ANZIIF Journal, V43, Issue 3 (Sept 2020) by ANZIIF

VOLUME 43

AUSTRALIAN & NEW ZEALAND INSTITUTE OF INSURANCE & FINANCE

2020

VOLUME 43 ISSUE NO. 3 / 2020

MODERN SLAVERY New resolutions for an age-old risk

Home truths of mass remote working Insuring the road less travelled

ANZIIF.COM

Contents• 14

A voice for New Zealand Ando Insurance founder John Lyon talks challenger brands, coming back from COVID-19 and what he’ll bring to the ANZIIF board.

With supply chains tainted by modern slavery across the Asia Pacific, it’s time for insurers and their customers to act.

The work-from-home revolution might be here to stay, revealing a whole new set of risks for the insurance industry.

PFAS have been labelled ‘the new asbestos’ but with the health stakes unconfirmed, insurers are treading with caution.

Remote working: home truths

A crime against humanity

28 Beating brain drain

When insurance professionals retire, they take their expertise with them. How can employers stem the skills loss?

Regulars

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32 The science of risk

An engineering background has proven pivotal to Yong Seek Ying’s success in managing risks for the ‘new normal’.

04 Courses & webinars

Troubled waters ahead?

36 Merging lanes

Changes in car manufacturing could signal a welcome easing of tensions between auto companies and insurers.

72 Member listing

ANZIIF welcomes its newest members.

73 Supporters

42 A case for going green Insurance policies don’t often cover environmental losses and businesses could be putting all their assets at risk.

ANZIIF’s 2020 corporate supporters.

74 The list

How to stay motivated and work more efficiently.

CONTENTS Volume 43 / Issue no.3 / 2020

Technical

The Journal is published quarterly by Hardie Grant Media for the Australian and New Zealand Institute of Insurance and Finance (ANZIIF).

•

Vol. 43 No. 3 ISSN 144-8505

Travel insurance by Susan Muldowney

GENERAL

IN SHORT

TRAVEL BY THE

GENERAL ENQUIRIESNUMBERS i COVID-19 has grounded the

global travel industry, and this has had a significant flow-on effect for insurers.

Tel (61 3) 9613 7200 Fax (61 3) 9642 4166 Email customerservice@anziif.com Web anziif.com i The travel insurance industry will need to consider whether pandemic exclusions are feasible in the future.

i In a post-pandemic landscape,

it’s the agile, innovative insurers who look set to lead the way.

2019

ANZIIF OFFICE

GENERAL

Insuring the road less travelled The pandemic sent the global travel industry into a tailspin. We take a look at how insurers can map a route to recovery.

The road less travelled With borders closed and flights grounded, few sectors have felt the impact of COVID-19 quite like the global travel industry. We take a look at how insurers can map a route to recovery.

JOURNAL ENQUIRIES

Account director Responding to the crisis Scott Elmslie This question was addressed in a recent ANZIIF webinar, Grounded: Will Travel Insurance Ever Recover?, which was presented by New Zealand-based actuary and principal at Taylor Fry Win-Li Toh. Toh outlined the challenges facing the industry and noted that insurers who are ‘treating their customers well’ will be among those who make it to the other side. However, insurers may have some work ahead of them. Of the approximately 1,000 COVID-19-related general insurance complaints received by the Australian Financial Complaints Authority up until 27 May, almost 900 related to travel claims, such as insurers refusing to cover COVID-19 losses or provide refunds for changed or unused trips.

Takeup increased for coverage for acts of terrorism following the Bali bombing in 2002 and the Brussels train station attack in 2016, After the 9/11 attacks in New York, demand for travel insurance actually increased sharply worldwide.

Subeditor Helen Eva

Walking the tightrope

Losing its shine

As the reinsurance sector continues to take hits from COVID-19, reinsurers are facing risks on both sides of the balance sheet.

From valuation challenges to sentimental customers, jewellery claims are becoming more complex.

The cracks in PI cover

Hacking the cyber sell

BROKING

Why brokers have a critical role to play in helping customers understand and protect themselves against cyber attacks.

Key contributors

JESSICA MUDDITT

SUSAN MULDOWNEY

ANNA GAME-LOPATA

Remote working — ‘Where does the workplace start and the home begin? Who is responsible for creating a safe environment? Responding to these needs will require careful thought.’

The road less travelled — ‘COVID-19 will test [insurers’] willingness to meet the needs of consumers with tailored, transparent products that are fit for the future of travel.’

A crime against humanity — ‘Like Fortescue Metals, insurance businesses across our region have the power, leverage and obligation to make a difference.’

Freelance writer & editor

2020

INTERNATIONAL FLIGHTS

Fast forward 12 months and just 147 overseas flights landed and took off in Australia, a decrease of 80 per cent as travel bans grounded planes worldwide.

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CLAIMS

Professional indemnity insurance is hardening for the construction industry. How can insurers mitigate the risks?

On April 18 last year, 722 international flights departed and arrived at Australian airports, with New Zealand (174), Singapore (88) and China (64) topping the list of destination and departure countries.

Tel (61 0) 490 091 713 Email jodavy@ hardiegrant.com

RISK

hen Qantas chief executive Alan Joyce cut at least 6,000 airline jobs due to COVID-19 back in June, he warned of a long and challenging road to recovery for the global travel industry. The airline’s international flights were unlikely to resume ‘in any real size’ until July 2021, he stated, adding that all airlines were ‘in the middle of the biggest crisis our industry has ever faced’. COVID-19 has grounded the global travel industry. Research from the World Travel & Tourism Council estimates that prolonged pandemic restrictions could jeopardise more than 197 million jobs in the sector and wipe off more than US$5.5 trillion from global GDP. The flow-on effect for travel insurers has been both swift and severe with sudden cuts to revenue and a spike in customer complaints, leaving the entire industry wondering ‘what does the future hold?’.

Managing editor Jo Davy

REINSURANCE

INTERNATIONAL FLIGHTS

Level 7, 628 Bourke Street, Melbourne, VIC 3000 Australia Tel (61 3) 9613 7200 Email journal@anziif.com

Account manager Hannah Louey

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Freelance business journalist

Art direction & design Dallas Budde, Natalie Lachina & Kate Slattery ADVERTISING ENQUIRIES

Nicole Prioste Tel (61 0) 410 618 331 Email nicoleprioste @ hardiegrant.com

Hardie Grant Media Private Bag 1600, South Yarra, Victoria, Australia 3141 Tel (61 3) 8520 6444 Web hardiegrantmedia.com Publication conditions No responsibility is accepted by ANZIIF or Hardie Grant Media for the accuracy of any statement or advice contained in the text or advertisements. The opinions expressed in the Journal are those of the authors, not ANZIIF, unless otherwise stated. ANZIIF accepts no responsibility for the accuracy of information in articles and advertisements in the Journal. Article submissions to the Journal by ANZIIF members and others are welcome. Articles are accepted for publication only on the condition that the authors give ANZIIF an irrevocable non-exclusive licence to publish the article and authorise ANZIIF to give permission for production of the article in whole or in part by other persons and organisations for educational and training purposes, as well as on ANZIIF websites. ©Hardie Grant Media, 2020. All rights reserved.

ANZIIF content writer

Connect with ANZIIF via social media and anziif.com ANZIIF.COM // ISSUE 03 2020 // JOURNAL

LEARNING

FEATURED COURSE:

RISC Reimagined 12 October — 6 November

The Reinsurance International Study Course (RISC) is widely considered the premier reinsurance training course in the southern hemisphere.

ISC Reimagined is a virtual study course that provides a unique opportunity for participants to work in teams in an online environment at a time when a digital skill set is becoming increasingly important. In early 2020, many organisations were already cutting back on travel as a cost reduction initiative, as well as for environmental reasons. COVID-19 has heightened these circumstances, magnifying the need for individuals to be able to collaborate and work as a team in a virtual world. RISC Reimagined removes any barriers that may have traditionally impeded attendance and participation. The course offers an affordable and accessible way for participants to upskill and prepare for the reinsurance landscape of the future from the convenience of their own learning environment.

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BENEFITS: • Exclusive learning

opportunities from top experts • Learn at your own convenience • Virtual active learning

and mentoring • Credits towards your ANZIIF

membership

LEARNING

VIRTUAL BREAKFAST:

General Insurance Virtual Breakfast 2 December

ANZIIF’s premier annual general insurance event is going online in 2020.

herever you are in Australia, New Zealand or across the AsiaPacific region, we look forward to seeing you at the General Insurance Virtual Breakfast this December. Running for over three decades, this event has become an important date in the calendar of insurance professionals who are keen to learn about the critical and current issues shaping the general insurance industry. In 2020, ANZIIF is building on this legacy by adapting this exclusive event to the virtual landscape. We will be joined by a panel of insurance experts to reflect on the current market, explore issues and opportunities and discuss what the future holds.

WHY ATTEND? • Learn more about areas of

change and opportunity for the industry • Gain a deeper understanding

of how these elements continue to shape industry dynamics and relationships • Interact with the expert panel

and ask questions • Broaden your network of

industry colleagues

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IN SHORT › The criminal act of slavery is prevalent globally and therefore likely in the supply chains of many major companies.

› Risks to insurers include exposure to criminal penalties, reputational damage and liability.

› Insurers can respond by

undertaking due diligence on their investment programs and offering cover to customers who undertake their own due diligence.

› In Australia, the Modern Slavery Act 2018 requires all entities with annual consolidated revenue of at least A$100 million to investigate and report on modern slavery in their supply chains.

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MODERN SLAVERY

by Anna Game-Lopata

A crime

against humanity With modern slavery prevalent in the Asia-Pacific region, the risks to insurers and their customers are significant. Now is the time for all businesses to act against it.

ndrew Forrest, the founder of Australian mining giant Fortescue Metals Group, was shocked by the prevalence of slavery within the supply chains of many global companies, starting with his own. In his submission to the 2017 joint Parliamentary inquiry into modern slavery, Forrest shared the confronting reality of a 2012 audit into one of Fortescue’s major suppliers: ‘Passports of workers were being withheld. Intermediary agencies were charging excessive fees that could never be repaid. Crippled by crushing debt and without their passports, workers were unable to leave their

Slavery by numbers, according to The Global Slavery Index 2018:

GLOBALLY

40.3 million

ASIA PACIFIC

24.9 million

AUSTRALIA

15,000

NEW ZEALAND

3,000

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Photography: iStockphoto

MAPPING MODERN SLAVERY

employment and had no ability to report the conditions in which they worked.’ Forrest realised that his company had been ‘creating conditions that allowed slavery to thrive’. His immediate response was to use Fortescue’s commercial leverage to ‘ensure all passports were returned, illegal fees paid back and major overhauls were made to ensure it did not happen again’. Fortescue Metals has since put systems in place to give effect to a zero-tolerance policy for modern slavery. Forrest has dedicated himself to anti-slavery activism, including co-founding the Walk Free Foundation, which publishes the Global Slavery Index.

MODERN SLAVERY

MODERN SLAVERY AROUND THE WORLD Italy In 2019, the Guardian revealed the Italian mafia is controlling tens of thousands of undocumented migrant workers in the tomatopicking industry.

West Africa The United States Department of Labor estimates around two million children are engaged in dangerous labour in cocoa bean regions in the Ivory Coast and Ghana. Chocolate brands such as Mars and Nestlé have pledged to remove slavery from their supply chains but are yet to do so.

Bangladesh The 2013 collapse of a garment factory in Bangladesh killed more than 1,100 people and shone a spotlight on shocking conditions faced by low-paid workers manufacturing clothes for high-end global fashion brands.

China

Brazil A 2019 Thomson Reuters investigation into Brazil’s billion-dollar coffee industry revealed coffee produced by forced labour was stamped ‘slavery-free’ and sold at a premium to major brands such as Starbucks and Nespresso. JOURNAL // ISSUE 01 2020 // ANZIIF.COM

Two international treaties, the League of Nations Slavery Convention 1926 and the United Nations Supplementary Convention 1956, offer definitions of slavery that talk about the ‘ownership’ of a person. Similarly, Roscoe Howell, founding director of Australian organisation Slavery Links, explains slavery as ‘when one person treats another person as in effect “owned”’. ‘Australia defines slavery in this way in its Criminal Code. Division 270 of the Code creates slavery offences from debt bondage and deceptive recruiting at the lower end through forced labour to servitude and slavery at the more serious end,’ says Howell, whose organisation fights slavery by developing policy and encouraging better decisions. In November 2018, the Australian Parliament passed the Modern Slavery Act, which defines modern slavery as ‘… situations where coercion, threats or deception are used to exploit victims and undermine or deprive them of their freedom’. ‘Slavery is a serious international crime,’ says Howell. ‘Governments are obliged to suppress slavery and prosecute wherever it is found.’ Howell says ancient systems of slavery have existed for many generations in the Indo-Asia-Pacific region. ‘Our awareness of these systems is emerging, but they have permeated our ways of being as well as the institutions that are supposed to support whole societies.’

Extent of the problem Data from Walk Free’s 2018 Global Slavery Index points to 15,000 people living in conditions of modern slavery in Australia and more than 40 million worldwide — and these figures are considered conservative, with many forms of modern slavery not being counted in global estimates. According to the index, almost 25 million of those enslaved are in forced labour, keeping a range of global industries afloat and generating billions of dollars in profits for those exploiting them. The Asia-Pacific region has the second-highest prevalence of slavery in the world and the highest prevalence of forced labour. Howell says systems of slavery prey on people who are vulnerable or disadvantaged. ‘Such people live precarious lives,’ he says. ‘They exist in the informal economy or outside it entirely. They are harvested as slaves and can be kept by extreme forms of overcontrol in places where mainstream life does not notice — on the streets of a city, on a farm or in a remote quarry.’

Photography: iStockphoto and Getty Images

Electronics manufacturers have come under scrutiny for exploitative working conditions, including forcing vocational students to work in production lines under the threat of failing to graduate if they decline, according to the Global Slavery Index.

What is modern slavery?

â&#x20AC;&#x2DC;Such people live precarious lives. They exist in the informal economy or outside it entirely. They are harvested as slaves and can be kept by extreme forms of over-control in places where mainstream life does not notice ...â&#x20AC;&#x2122; Roscoe Howell / Slavery Links

MODERN SLAVERY

‘High-risk sectors include extractives, textiles and fashion, fishing, electronics, cleaning and agriculture [including horticulture], to name a few.’ Chris Crewther / 2017 Modern Slavery Inquiry

EXISTING LEGISLATION AROUND THE REGION Within the region, various jurisdictions have criminal laws in place to stop and help prevent modern slavery crimes. Existing criminal laws in most jurisdictions need improvement and strengthening, and in some jurisdictions, there are gaps. In Australia, at the Commonwealth level, such laws include the Criminal Code Act 1995, the Crimes Act 1914 and the Foreign Passports (Law Enforcement and Security) Act 2005, to name a few. In terms of transparency in supply chains legislation, Australia stands out in the region with its Modern Slavery Act 2018, building in many cases on the UK’s Modern Slavery Act 2015. In New Zealand, there is the Crimes Act 1961, while in India, legislation includes the Indian Penal Code of 1860, the Bonded Labour System (Abolition) Act 1976 and the Child Labour (Prohibition and Regulation) Act 1986, to again name but a few. In Hong Kong, a Modern Slavery Bill has been put forward on a number of occasions, and similar legislation has also been considered in Singapore, New Zealand and other jurisdictions. Outside the Asia-Pacific region, Canada is also close to having its own Modern Slavery Act.

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Former Australian Member of Parliament Chris Crewther instigated and chaired the 2017 Modern Slavery Inquiry, which culminated in the country’s first Modern Slavery Act. He says industries that produce goods and offer services requiring a larger level of low-skilled and intermittent labour jobs are more susceptible than others to slavery. ‘High-risk sectors include extractives, textiles and fashion, fishing, electronics, cleaning and agriculture [including horticulture], to name a few,’ he says.

Australia takes a stand Australia’s Modern Slavery Act 2018 created a new way of thinking about slavery, as a problem that could possibly be reduced if large entities would look for it in their supply chains and take action to remove it. ‘In this new way of thinking, the legal term “modern slavery” includes the crime of slavery, the crime of human trafficking and the worst forms of child labour,’ says Howell. According to Crewther, Australians and New Zealanders have a key role to play in helping stamp out modern slavery. ‘Australian and New Zealand entities, governments and individuals have in-depth relationships, operations, investments and supply chains in the Asia Pacific,’ he says. In addition, ‘insurers have a key role to play, along with entities like banks, asset managers, investment firms and super funds, to lead by example and help shift insured customers and the marketplace more generally in the right direction on modern slavery’.

Obligations under the Act The Modern Slavery Act applies to entities based or operating in Australia, whose annual consolidated revenue is at least A$100 million (including the government, which is a world first). With the first reporting deadline approaching, entities operating at that level must provide a modern slavery statement. Insurers have the same obligations to report under the Modern Slavery Act in relation to mandatory criteria within six months of year end, with a three-month COVID-19 extension recently being granted. ‘Smaller insurers under that revenue level can, and should, voluntarily report under the legislation,’ says Crewther. ‘Doing so shows leadership for both those insurers and their customers, reduces risk for themselves and their customers, and helps tackle the crime of modern slavery.’

Risks for businesses and insurers

HOW INSURANCE IMPACTED THE TRANSATLANTIC SLAVE TRADE The progressive restraint of insurance for slave-trading ships under British law was a significant influence in bringing the Atlantic slave trade to an end. For a ship that was not able to avoid the British anti-slavery naval blockade, the penalties were substantial. Added to fines for each slave carried, the penalties would have altered the cost of doing business. More substantial would have been the possibility of loss of a ship and / or cargo that was not covered by insurance. Remember that in the period after the Napoleonic Wars, Britain had a stranglehold on the registration and insurance of shipping from not only its own domain, but also parts of Europe as well. The 1807 and 1824 United Kingdom Slave Trade Acts changed the ratio of costs to benefits such that business became less tenable where that business was the slave trade. Source: Slavery Links

Illustration: iStockphoto

Importantly, many entities operating in multiple jurisdictions (such as New Zealand companies operating in Australia and / or the United Kingdom) must also report under existing laws in those countries. ‘Existing national laws can have a clear transnational effect across operations and supply chains of multiple entities operating in the Asia Pacific and globally,’ says Crewther.

Modern slavery is not just an emerging risk for insurers; it is an existing risk. Insured businesses and associated management turning a blind eye to modern slavery in their supply chains, or perpetrating it themselves, may also expose themselves to criminal charges, civil penalties and liabilities, reputational and financial risks, investment risks, condemnation from customers, shareholders, employees and the wider community and potential lawsuits around misleading and deceptive conduct. With many years of human rights practice, including supply chain management advice to entities following the enactment of the UK Modern Slavery Act 2015, Norton Rose Fulbright partner Abigail McGregor is an expert on the preparation of modern slavery statements. She says boards signing modern slavery statements on behalf of their company could expose insurers to claims under directors and officers (D&O) insurance policies. ‘For instance, D&O could be triggered if a claim is made that the directors of an insured company approved a statement, but were knowingly concerned in a misleading or deceptive conduct,’ McGregor explains. ‘Likewise, a claim might be made under the laws of certain countries alleging that an insured company breached a duty of care to protect its workers. ‘Board members need to ensure there is a reasonable basis for the expression of opinion in the statements they adopt and sign. They want to make sure they’re not putting their names to something that hasn’t been properly thought through and doesn’t comply with the Act.’

Exposure through investment Further complexity arises in the exposure to modern slavery through insurers’ investment decisions. ‘When making investment decisions, the onus is on insurers to take into consideration how they might be connected to modern slavery through those investments and what kind of due diligence can be undertaken,’ says McGregor. ‘This can definitely be challenging where insurers have large portfolios.’ However, she adds that decisions around the supply chain risks of modern slavery should be considered using modelling alongside decisions around environmental, social and governance risk, which are increasingly common. ANZIIF.COM // ISSUE 03 2020 // JOURNAL

MODERN SLAVERY

‘No-one anticipates perfection, but the aim of the game is transparency ... to encourage good behaviour, rather than name-and-shame ...’ Abigail McGregor / Norton Rose Fulbright

Facilitating change McGregor also points to the banking sector, which, under the United Nations Guiding Principles on Business and Human Rights and soon-to-be-adopted Equator Principles 4, has been working on managing the risk that it contributes to modern slavery directly or indirectly through the financing of projects with human rights impacts. ‘There is parallel thinking in relation to insurance, as the provision of insurance is a fundamental part of doing business,’ she says. ‘It has to only be a matter of time before the attention banks get in relation to the facilitation of business is extended to insurers. ‘At the very least, for example, insurers could use their leverage with projects in difficult locations by making agreements with insureds that cover will only be provided for incidents, say in Pakistan, Burundi or Cambodia, if the insured can demonstrate that proper processes are in place to manage the risk of modern slavery. ‘In relation to project finance, the Equator Principles and the Principles for Responsible Investment all provide mechanisms by which financial institutions can manage risk. ‘The approach is good for insurers because it reduces risk,’ she adds. ‘They could drive change. And that’s what the UN Guiding Principles would say insurers should be doing when they’re insuring a risk in a location or business that is high risk for modern slavery.’

Key role for customers

LEFT Insurers can use their leverage when insuring a risk in locations where modern slavery is rife.

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In addition, Crewther says insurers can reduce risk by ‘helping and encouraging insured customers to: understand modern slavery; take the issue seriously; understand the risks; take a prudential approach; undertake proper due diligence within their operations and supply chains; be transparent; and be leaders in tackling this crime’. ‘Expectations should also be clearly communicated to business customers, management and employees of insurers and brokers themselves, that any modern slavery crimes found or suspected must be reported to the appropriate authorities,’ he says.

‘Suppliers should be engaged to eliminate the modern slavery and / or exploitation occurring, to remediate any harm caused and to prevent future harm, only cutting off those suppliers if they will not take such actions or appropriate actions to do so.’ Abigail McGregor says Norton Rose Fulbright’s joint research with the British Institute of International and Comparative Law found that companies who sacked suppliers where child labour was found simply prompted the supplier to keep trading without doing anything to address the issue. ‘Employees of that supplier lost the benefits of advocacy from a client arguing for their better treatment,’ McGregor explains. ‘Often, a far more effective answer is for the company to exercise its leverage to have the supplier improve its performance.’

The road to transparency

Photography: iStockphoto and Getty Images

McGregor says compliance with the Modern Slavery Act does not come with the expectation that everyone can describe and manage their supply chain risk in ‘year one’. ‘No-one anticipates perfection, but the aim of the game is transparency,’ she says. For this reason, the Act comes with no penalties for non-compliance other than the ability for the government to publicly list non-compliant entities; however this will only occur after these entities have been given an opportunity to comply. ‘The government aims to engage with business to encourage good behaviour, rather than nameand-shame, and it is likely that it will be slow to add names to the register,’ says McGregor. ‘Under the Modern Slavery Act, the driver for change is transparency and accountability rather than criminal penalties,’ adds Fraser Stowers, executive manager of procurement at IAG, whose team is responsible for developing and overseeing IAG’s cross-functional modern slavery program. ‘We support a collaborative approach across the industry. The more we speak the same language within the industry on modern slavery, the better able we all are to look deeper into our supply chains and make improvements where needed.’ Stowers adds that creating visibility and transparency is going to take a long time, but the Modern Slavery Act 2018 is a good start. ‘We look forward to the insurance industry in Australia and New Zealand working more closely together on this issue, to lift the bar as a sector.’

IAG: A CASE STUDY IAG will be reporting under the Modern Slavery Act, and the insurance giant is working towards publishing its first statement later this year. ‘We are driven by our purpose to make our world a safer place,’ says Fraser Stowers, executive manager of procurement at IAG. ‘And that doesn’t only apply to our customers and our people — it means making the world a safer place for everyone who contributes to our business, including people who work across our supply chain and investing responsibly.’ As part of IAG’s modern slavery program, one of the initiatives undertaken was to launch a Supplier Code of Conduct in 2019. This outlines a range of expectations for standards covering environment, human rights, modern slavery, social expectations, safety, risk management, data security and other aspects of good governance. The Supplier Code applies to all suppliers regardless of their geographical location. ‘Over the coming months, we will be working with our suppliers to understand what they’re doing well against the expectations outlined in the Supplier Code and assist where there are opportunities for improvement,’ says Stowers. ‘My team will also be running information sessions on the Supplier Code for our people who manage suppliers.’

ANNA GAME-LOPATA ANZIIF content writer

‘I was moved by Andrew Forrest’s remarks that Australians sing the words of their national anthem, “Australians all let us rejoice, for we are young and free …” without a thought for those enslaved under their noses, providing the props for their lifestyle. Like Fortescue Metals, insurance businesses across our region have the power, leverage and obligation to make a difference.’

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PROFILE

John Lyon Story Domini Stuart Photography Mark Smith

A voice for New Zealand As CEO and founder of Ando Insurance, John Lyon brings a wealth of local insight and experience to his new position on the ANZIIF board.

n the mid-2000s, John Lyon spent almost two years on the ANZIIF board as president of the New Zealand Branch Executive Committee. When he was invited back to the board in May this year, he welcomed the opportunity to contribute again and to advocate once more for New Zealand members. ‘Paul Munton and Karl Armstrong have done a great job of representing New Zealand’s insurance market over recent years,’ he says. ‘Now they’ve moved on, I’m very happy to work alongside Catherine Dixon in that role.’ As CEO of Ando, the company he formed in 2015, Lyon is also keen to share his contacts and industry relationships. ‘My aim is to help develop member services and propositions that will help both ANZIIF and the New Zealand industry,’ he says. ‘I firmly believe the insurance sector needs a professional body that, along with educational and accreditation services, provides a forum for networking and a sense of community. ANZIIF is ideally placed to do this.’

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A change in behaviour

Lyon is also pleased that ANZIIF now has a proposition for advisers and brokers in New Zealand to achieve accreditation under the new code of conduct regulations that come into effect in March 2021. ‘The regulations require that all brokers achieve their accreditation, which is a good development,’ he says. ‘ANZIIF’s associated accreditation program will add an extra dimension to the industry by enabling brokers to remain with a service they know and trust.’ However, notes Lyon, regulatory changes can only go so far in bringing about lasting change. ‘It’s clear that the increasing focus on conduct, transparency and accountability is a permanent shift driven by consumer demand and competition within the industry,’ he says. ‘Anything that helps raise the standards of professionalism and advice is going to be beneficial. But we have to remember that, ultimately, everything comes down to the behaviour of individuals and individual firms.’

Making New Zealand home

Lyon’s journey to the ANZIIF boardroom began in Dublin in 1977, the year he left school. Having decided against university, he took the first job on offer — a traineeship with Sun Alliance. After 10 years with the company in Ireland and four more in the United Kingdom, he accepted a two-year secondment to New Zealand. Three decades on, he’s still there. ‘My career has been quite varied, covering underwriting, sales and claims,’ he says. ‘That put me in a good position to move into a general management role with Royal Sun Alliance, as it was back then. As it evolved to become Vero Insurance, I took on various executive roles that built up my management and leadership experience.’ In 2008, he was invited to run Lumley Insurance New Zealand. ‘At the time, the company wasn’t performing as well as shareholders expected,’ he says. ‘My job was very much focused on reinventing the company by giving it a major overhaul. We had to refresh the technology from end to end and initiate significant changes in the culture, bringing more process and discipline to many aspects of the business. It was a great opportunity for me to apply different thinking, bring in new talent and help current employees to develop their true potential.’

‘I was more interested in leading a challenger brand than in being part of a large marketdominant organisation.’ Then, in 2010 and 2011, the Canterbury earthquakes struck. ‘My time with Lumley certainly tested all of my leadership capabilities, from the fastpaced, reasonably autocratic approach required in a turnaround situation through a more consultative approach needed to manage major technology changes to crisis management in the earthquake environment,’ he says. Then came a different kind of challenge. ‘I’d spent five or so years building up the team, bringing people into the business, turning the business around and re-establishing the culture and the brand when I was told the business was being sold,’ he says.

A gap in the market

Lumley was acquired by IAG in 2014 and Lyon left soon after. ‘IAG is a hugely successful company, but I was more interested in leading a challenger brand than being part of a large market-dominant organisation,’ he says. ‘I’d also learned that, even when you’re CEO, if someone up the line has decision-making powers, your influence on certain outcomes can be quite tenuous, which means you can’t fully protect the interests of key stakeholders like staff and partners.’

TWOMINUTE BIO John Lyon COMPANY // Ando Insurance TITLE // Chief executive officer

SLIDING DOORS MOMENT ‘Deciding not to go to university in favour of earning a living.’

CAREER TURNING POINT John Lyon says his appointment to CEO of Lumley Insurance was a chance to step up from being on an executive team to leading one. After the Lumley sale, he saw an opportunity to co-found Ando with a group of colleagues.

BEYOND THE DAY JOB Apart from family activities, Lyon’s main passions are photography and travel — preferably combined — staying fit and playing soccer. His most recent trips include Iran, Mongolia and Antarctica, but with fewer opportunities for travel in the current pandemic situation, he’s taking time to explore more of New Zealand’s landscapes.

TOP TIP ‘Rather than attempting to predict the future, keep your options open and try to understand the influencing trends. Follow those influences and, if you’re agile enough, you can respond as soon as you spot an opportunity.’

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PROFILE

He and a group of colleagues responded by forming Ando in 2015. ‘We could see that the market was ready for something new and fresh,’ says Lyon. ‘We believed that, with a hand-picked team of likeminded experts wrapped up in a vibrant culture supported by current state technology, we could build propositions and services to support the local market.’ From the outset, Ando appointed global insurance technology systems provider SSP to implement its Pure Insurance platform designed to support digital innovation and new products as they enter the market. Since then, the focus has been on improving customer experiences by harnessing new technologies, such as Live Assessment, a New Zealand-first digital claims handling tool. Customers make a claim using live-streamed video software, which enables claims handlers to make an assessment and process the claim almost immediately. The technology provides a streamlined experience for the customer and reduces processing times, giving staff more opportunities to engage with their clients. Ando operates as an underwriting agency, underwritten by the Hollard Insurance Company with some specialist facilities provided by Lloyd’s. ‘We needed a partner and we saw right away that Hollard was a good fit in terms of our values and ways of operating,’ says Lyon. ‘As they have a 40 per cent stake in the business, our interests are also closely aligned.’ The rest of the business is owned by Ando’s senior management team, many of whom are former Lumley colleagues. Lyon says the owner-operator model was ‘a key element in driving commercial outcomes for the business’, which is closing in on an annual turnover of NZ$250 million.

‘I don’t think there’s been a better opportunity in the industry to differentiate yourself by delivering value and customised services to customers.’

Uncertain times

Lyon believes the New Zealand insurance industry did well to maintain operational continuity through the worst of COVID-19. ‘We were fortunate that lockdown didn’t last as long as in some other parts of the world,’ he says. ‘But it seems we’re yet to experience the full economic impact, as there are predictions of more business failures and rising unemployment over the next three to six months.’ Most of Ando’s employees were already set up to work remotely, and it took just 48 hours to settle the rest into working from home. ‘A really big challenge that we and others are facing now is how to maintain your culture when people are no longer working as part of a physical community,’ he says. JOURNAL // ISSUE 03 2020 // ANZIIF.COM

PICTURED John Lyon says the New Zealand market was ‘ready for something new and fresh’ when he formed Ando with former colleagues in 2015.

‘For Ando, culture is imperative. It drives behaviour and conduct, and it’s also one of our biggest competitive advantages. We don’t know how this will play out over the next year but we do know it won’t be the same as it was before.’ Despite the uncertainty, he’s very excited about the future. ‘Agility and insight are key,’ he says. ‘I don’t think there’s been a better opportunity in the industry to differentiate yourself by delivering value and customised services to customers.’

WORKING FROM HOME by Jessica Mudditt

Home truths of

remote working We’re in the midst of a work-from-home revolution, with employees expected to retain flexible work practices long after the COVID-19 health threat subsides. But the mass shift to remote working has revealed new risks for the insurance industry.

he COVID-19 pandemic saw millions of formerly office-bound workers take up remote working in an incredibly short space of time. While some companies in the Asia Pacific are now beginning to cautiously welcome their employees back to the office — if only on a staggered basis — many have decided to embrace a more flexible style of working regardless of whether the public health situation demands it. The benefits of a remote workforce took Steadfast Group’s chief executive officer Robert Kelly completely by surprise. What started out as an emergency response to a grave public health threat became an invaluable workplace experiment. ‘Even before the government issued advice for everyone to work from home [in March], it sounded like Armageddon was about to break out,’ says Kelly. ‘I was worried about our people getting infected on public transport, so we made the decision to have everyone working from home before it became official advice.’

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

IN SHORT › COVID-19 has brought

about a huge shift in the numbers of people working from home. For those who continue this practice on an ongoing basis, it will likely require some adjustments to employment contracts to factor in responsibility for certain risks.

› Insurers that step up to the demand for policies that can accommodate the new risk profile will stand out among the competition — and they have a lot to lose if they fail to be proactive in correctly calculating the risks.

› Post-pandemic, many

businesses may choose a hybrid system, with employees working from both home and office or even using a hired space for certain meetings.

‘If you’d said to me six months ago that we should try this out, I would’ve thought you were crazy. It’s true that necessity is the mother of invention.’ Robert Kelly / Steadfast Group

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

WORKING FROM HOME

‘Working from home makes it hard to distinguish between work-related and non-workrelated injuries ... something that I believe current insurance products don’t generally cater for.’ Erik Bleekrode / KPMG

Fortunately, at the beginning of February, Steadfast had run a business continuity drill for 400 of its staff in Sydney. The scenario was that a bomb blast suddenly required everyone to work from home. ‘We found a couple of holes in our plan and quickly rectified them, so by the time everyone was actually sent home as a result of COVID-19, we were ready,’ says Kelly. ‘We made the transition over a three-day period, and within a few days everything was running like clockwork — it was absolutely amazing.’ Employee productivity at Steadfast has improved with remote working, although Kelly laments the missing social aspect, which he considers important to retain in the long term. A recent Steadfast staff survey found that 64 per cent of employees would like to have a split home-office work routine, 29 per cent prefer to only work from home and 7 per cent prefer only to work from the office. Based on the feedback, Steadfast is implementing a blended work system that will allow all employees to divide their time between the office and home on a permanent and ongoing basis. ‘If you’d said to me six months ago that we should try this out, I would’ve thought you were crazy,’ admits Kelly. ‘It’s true that necessity is the mother of invention.’ JOURNAL // ISSUE 03 2020 // ANZIIF.COM

For Steadfast’s six staff members based in New Zealand, the remote working experience was more short-lived. ‘New Zealand went into a strict lockdown very quickly so everyone immediately began working from home,’ says Kelly, adding that staff have since begun returning to the office. ‘Some of our staff have children at home and it was their preference to return to the office for fewer distractions, after alternating days for a while. Our office is spacious, so no-one is on top of each other.’

Curly legal questions With every home work environment being unique — as well as out of sight of their employer — checks are needed to ensure the safety of employees. Steadfast staff in Australia and New Zealand were required to carry out self-evaluations and were provided with office furniture and computer equipment as needed. Kelly feels that insurance and broking personnel are particularly well placed to assess any potential risks, and he is confident that his staff would not lodge fraudulent workplace injury claims. However, Kelly acknowledges that some employers could be exposed. Indeed, a recent Supreme Court decision in New South Wales found that an employer could be liable for death or injuries incurred by employees while working from home, even when the circumstances were not clear-cut. In June, the Supreme Court of New South Wales found that under the Workers Compensation Act 1987, an insurer was liable to pay death benefits to a woman’s two dependent children after she was murdered by her de facto partner. Her partner was also her co-worker and supervisor in the familyrun financial services company. The woman’s de facto partner had paranoid delusions and believed she was going to steal his clients. The time of her murder, which occurred between her usual working hours of 8.00 am and 10.00 am, was also considered material. According to Sally Woodward, a partner at Norton Rose Fulbright, an employer has a responsibility to take all reasonable steps to ensure that an

employee has a safe place of work — and they cannot contract out of it simply because an employee is working from home. ‘People have been working from home for a long time, but certainly not in the unprecedented numbers we are seeing, and this is likely to continue for a long time,’ says Woodward. ‘At the beginning of the pandemic, a lot of employers possibly hadn’t thought through the implications of having large numbers of the workforce working from home. As the dust settles, employers need to take a very careful look at their work-from-home policies, create clear guidelines for working from home and take all reasonable steps to ensure their workers are safe.’

Whose fault is it? With increasingly blurred lines between the home and workplace, Woodward says that establishing the causative factors could be complex. For example, what if an employee burns themselves on their sandwich press while making lunch? ‘There’s no question that if you were using the sandwich toaster at work and you burnt yourself, you could make a claim. So, by extension, if you were making a toasted sandwich in the course of your day’s work, then there is the potential for a claim,’ she says. ‘The test would be whether the injury occurred during the course of your employment.’ With no witnesses, workplace injury claims may

need to be investigated more thoroughly, she adds, but at the same time it is difficult to refute a claim unless there are clear anomalies. ‘You’re not going to be installing CCTV in people’s homes,’ she points out. A spokesperson from New South Wales workplace insurance and care services agency icare says there must be evidence that the worker has sustained an injury in the course of employment — and that employment was a ‘substantial contributing factor’ to the injury. ‘Employers need to encourage workers to take extra care for their personal safety whilst at home, just as they would in their normal workplace,’ says an icare spokesperson. ‘This includes making sure that the work location is appropriate ergonomically and … free of trip hazards with adequate lighting.’

Getting ahead of the curve Erik Bleekrode, head of insurance KPMG China and Asia Pacific, believes that insurers should be proactive in meeting the new needs that arise through mass remote working. ‘Working from home makes it hard to distinguish between work-related and non-work-related injuries. And that is something that I believe current insurance products generally don’t cater for,’ he says. ‘It’s also a new phenomenon, which means that insurers don’t have much data. There will therefore need to be more investigation and analysis of such claims.’ ANZIIF.COM // ISSUE 03 2020 // JOURNAL

WORKING FROM HOME

SPACE AND SECURITY A CHALLENGE IN HONG KONG While many employees in Australia relished being able to work from home, the sentiment wasn’t as strong in Hong Kong, says Erik Bleekrode, head of insurance KPMG China and Asia Pacific. ‘In Hong Kong and other large Asian cities, people tend to live in small apartments with families. While working from home is a practical alternative, it may not necessarily be a very pleasant one,’ he says. Nonetheless, Bleekrode expects that more people in the region will work from home and that it will be increasingly acceptable to do so — but that it will be done on a smaller scale than in some Western countries.

Bleekrode believes that insurers who are ahead of the curve will differentiate themselves in the market. ‘They also have a vested interest in meeting these new needs. As the risk profile of current policies has changed because the world is changing, insurers need to make sure they have properly assessed and priced those risks, otherwise they could end up being the ultimate payer,’ he warns.

Status quo for some However, not every business is rushing to enact permanent work-from-home policies. Karen Hardy, principal broker at Acme Insurance Brokers in Queensland, says that many of the advantages of remote working don’t apply to smaller organisations like hers. ‘Our internet connection at home isn’t reliable enough to work remotely, so the five of us continued working from the office and just locked ourselves in,’ she says, adding that other brokers have found that working from home has been unproductive. ‘What would normally take five seconds to walk over to someone’s office and say, “what do you reckon about this?” requires scheduling a call and turns into a half-hour job.’ Hardy also believes that workplace injury claims could potentially become ‘a can of worms’ with claimants misrepresenting the circumstances of an injury. She also worries about confidential client data being exposed. ‘Cyber attacks could become an issue if other family members are using a work device as a play tool,’ she says. ‘Employment contracts will need to be adapted to address cybersecurity and privacy issues. I certainly would not like to see my staff tapping into the free wi-fi at their local cafe — that is just asking for trouble.’ JOURNAL // ISSUE 03 2020 // ANZIIF.COM

Hong Kong never had the 1.5 metre rule for social distancing and restaurants and cafes remained open (although face masks have been widely used since the pandemic first broke out). This meant that many ended up working from cafes like Starbucks because they had better wi-fi. ‘People were so hungry for information during the crisis that there was a much bigger chance of them clicking on a phishing link,’ says Bleekrode. ‘The insurance industry may need to rethink what remote working means from a security perspective.’

Insurance leader at PwC in Singapore, Shea Leen Woo, agrees. ‘There will be an increase in cyber risk with most employees working from home,’ she says. ‘In addition to cyber risks, there are also data privacy concerns — not only with the systems and devices used by the employees, but potentially housemates may also gain access to confidential client or company information.’ Although Hardy emphasises to clients that the risk of cyber attacks is heightened while working from home, she says most are complacent. ‘Out of 5,000 clients, only five will take out a cybercrime policy. They say, “Oh it’ll never happen to me — that only happens to city folk with servers”.’ Similarly, she believes that the prospect of clients visiting employees at home is fraught with danger and would require employees to take out public liability insurance. ‘How many people do you know living in a dinky old house?’ she says. ‘If you actually had to adhere to workplace health and safety legislation, you’d have yellow paint and warnings all over it.’ Hardy believes there will be increasing demand for room hire on an hourly rate for meetings, or employees will schedule meetings for days they attend the office, which is precisely what Steadfast will be doing as it embraces the ‘new normal’ in 2021 and beyond. JESSICA MUDDITT Freelance business journalist

‘At first, it seems that working from home was successfully taken up by the vast majority of employees, even though it was done in a huge rush. However, as employers consider making it a permanent switch, the issues begin to unravel. Where does the workplace start and the home begin? Who is responsible for creating a safe environment? Responding to these new needs will require a lot of careful thought from insurers.’

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LIFE

IN SHORT › Land that has a

history of industrial use could potentially be contaminated with PFAS, especially firefighting training facilities, defence bases and airports.

› PFAS do not easily break down in the environment or in humans, earning them the nickname ‘forever chemicals’. They can travel long distances through soil and water.

› While health studies are

limited, there is evidence that PFAS may particularly impact reproductive hormones, cholesterol and kidney function.

Troubled waters ahead?

Growing global concern about exposure to chemicals known as PFAS has led some to label it the new asbestos. But with the health stakes still unconfirmed, how can insurers manage the risks?

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

PFAS by Alexandra Cain

irst manufactured in the 1940s, per- and polyfluoroalkyl substances — or PFAS — were heralded for having unique and versatile properties that made them attractive to a wide range of industries. Eighty years on, however, the use of these man-made chemicals has become a contentious environmental and health issue, with important implications for insurers and policyholders. Already PFAS have been the subject of some of the biggest class actions ever seen in Australia and New Zealand and are now becoming an emerging issue across Asia. Much of the focus to date has revolved around firefighting training and defence base locations, with allegations that products containing PFAS have contaminated land, water and local environments. One of the products in question, aqueous film forming foam, is used to suppress fires and has been phased out in Australia over the past decade. There are, in fact, more than 4,000 different types of PFAS, with the bestknown and most extensively produced being perfluorooctanoic acid (PFOA) and perfluorooctane sulfonate (PFOS). ‘These chemicals have properties that make them great for consumer and industrial applications — for instance,

they are highly soluble and resistant to water, dirt and heat,’ says Cami Mok, client manager, Environmental Services Group, at Aon. ‘But it is also these properties that have made PFAS problematic. It is an extremely mobile contaminant and does not break down in the environment. Simply put, PFAS stay around a long time and accumulate in the human body and in the environment.’ There is conjecture, however, about what this means for human health. In 2018, the Australian Government set up an expert health panel to undertake a review of existing scientific reports on the potential health impacts from PFAS exposure. The panel concluded there was only limited evidence of any link with human disease but noted that ‘important health effects for individuals exposed to PFAS cannot be ruled out based on the current evidence’. Environmental lawyer and Norton Rose Fulbright partner Elizabeth Wild points to cases in the United States ‘where they’ve accepted that there may be certain categories of health impacts to reproductive hormones, cholesterol and kidney function’. ‘These effects have not been conclusively determined and nobody knows the levels of exposure required to feel those impacts. Is it just direct exposure? Is it eating fish or other animals that might have absorbed PFAS?

WHAT WE KNOW ABOUT PFAS PFAS are a group of more than 4,000 chemicals used to make products water and stain-resistent, such as non-

stick cookware, food packaging, textiles and firefighting foam.

Most countries have phased out the use of PFAS chemicals in manufacturing consumer products, but they are commonly found in

the environment

at low levels due to their historical use.

They have been dubbed forever

chemicals

because they

do not break down in the

environment and can travel long distances in water and air currents.

The full effects of PFAS exposure on human health are still unknown, but authorities say they cannot rule out the potential

for adverse outcomes.

Source: Australian Health Protection Principal Committee PFAS FactSheet, 2016 ANZIIF.COM // ISSUE 03 2020 // JOURNAL

PFAS

The jury’s out,’ she says. The US Environmental Protection Authority has issued strong guidance about possible exposure to PFAS. It has said these chemicals can cause tumours in animals and increased cholesterol levels among exposed populations. It has also indicated PFAS could possibly be a factor in low infant birth weight and could have an influence on the immune system, cancer and thyroid hormone disruption. Across South-East Asia, studies in Indonesia, Malaysia and Vietnam have found PFAS contamination in breast milk.

Understanding the scope

When it comes to land contamination issues, the soluble nature of PFAS means they can travel a long way in groundwater, thereby impacting other regions. Jacinta Studdert, a partner at law firm Clyde & Co, notes that PFAS have been commonly used at airports, firefighting training facilities and to combat fires without the benefit of the knowledge we now have about their potential dangers. ‘There are some real issues and risks, including legal risks, associated with that use,’ she says. In terms of the scope of the problem, Wild points to a number of different areas. ‘The use of PFAS is far more prevalent than just firefighting products,’ she says. ‘They’re in the Scotchgard you protect your couch with and in non-stick fry pans. They can also create an issue for landfills. Because PFAS get into groundwater, they may end up in rivers and lakes, where they can really become a challenge.’ The question is what to do with PFAS contamination once it has been identified. ‘Do you really need to do anything about it, or can you just leave it there? That depends where the PFAS may end up,’ says Wild.

A precautionary approach

Studdert says that, in Australia, regulators are taking a precautionary approach to policies and regulation concerning PFAS. ‘A lot of work is being carried out across the country at a state and federal level in identifying how big a problem the impact is and the appropriate response,’ she says. As well as a PFAS National Environmental Management Plan, the Australian Government has released a draft Commonwealth Environmental Management Guidance document to help agencies assess and manage PFOS and PFOA contamination. ‘The federal government, along with many scientists and environmental experts, are continuing to work on the appropriate response,’ says Studdert.

Rising litigation

Concerns about PFAS first came to light in the US in the late 1990s, following a farmer’s suspicions that pollution from chemical corporation DuPont’s nearby West Virginia plant was killing his cows. Further investigations revealed that high concentrations of PFOA, used to manufacture products like Teflon, was leaching into the surrounding community’s drinking water. DuPont had been using PFOA since the 1950s. Increasing awareness of the environmental and health impacts of PFAS has led to a number of lawsuits and civil penalties in the US, including a US$670 million class action against DuPont. PFOA is now being phased out in the US (DuPont phased it out in 2013). In April this year, PFAS became the focus of Australia’s largest-ever class action when 40,000 people sued the federal government, alleging their land and water supplies

‘The use of PFAS is far more prevalent than just firefighting products … Because PFAS get into groundwater, they may end up in rivers and lakes, where they can really become a challenge.’ Elizabeth Wild / Norton Rose Fulbright

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

had been contaminated by PFAS used on military bases and that their property values had subsequently plummeted. The government has settled three of these class actions concerning defence bases at Williamtown in New South Wales, Oakey in Queensland and Katherine in the Northern Territory. It’s understood that there are nearly 100 similarly affected sites in Australia. In New Zealand, PFAS contamination has been found in soil and water around the air force bases at Woodbourne, on the south island, and Ohakea, on the north island, as well as at commercial airports, ports, military bases, fuel storage facilities and refineries. But New Zealand Defence Force suppliers have advised they have not provided any foam products containing PFAS above trace levels since 2002. PFAS is used widely in South-East Asian countries and has been found to contaminate land and waterways. It’s been discovered in sediment in Bangladesh and Indonesia, in river water in Nepal, Thailand and Vietnam, in groundwater in Thailand and Vietnam and in drinking water in Malaysia, Thailand and Vietnam. It has also contaminated the Sundarbans mangrove area, a UNESCO World Heritage Site that stretches across Bangladesh and India.

Insurance implications

Environmental insurance can cover the clean-up costs associated with PFAS and third-party liabilities from pollution and contamination at a policyholder’s site. Aon’s Mok says the majority of environmental underwriters can underwrite risks in Australia, New Zealand and South-East Asia. Insurers take into account country-specific and region-specific factors, including different regulatory frameworks. When writing policies, environmental underwriters are looking at the activities occurring at a site and activities that have occurred in the past. Firefighting raises a flag to an underwriter that there could be PFAS contamination. ‘For such a site, or one that has had a lengthy industrial history, an underwriter will want to understand the potential for legacy contamination, whether that be PFAS or asbestos, through a review of an environmental site assessment or site investigation report,’ says Mok. Amber Lepparde, national environmental

THE QANTAS SPILL THAT CONTAMINATED A RIVER PFAS came to national attention in Australia in 2017 when thousands of litres of firefighting foam ended up in the Brisbane River after leaking from a Qantas hangar at Brisbane Airport. The airline had to compensate commercial fishers who were unable to work as a result of a temporary fishing ban. At the time, tests revealed the river and upstream sites contained PFAS contaminants from not only the Qantas spill but also a number of other sources. Qantas subsequently announced it would phase out the use of firefighting foam containing PFAS chemicals.

practice leader at Marsh, says insurers are currently reviewing their portfolios, checking sites they are insuring for preexisting pollution conditions coverage and underwriting the exposure for new insurance applications. ‘The majority of exposures relate to PFAS that have been present in the environment for a long time,’ says Lepparde. ‘The way they typically assess the risk of PFAS is through a preliminary site investigation undertaken by an accredited environmental consultant. The report delves into historical site activities and surrounding site activities to evaluate whether such activities could have resulted in PFAS contamination, including if there is a risk of contamination migrating from a surrounding site to the insured site.’ An insurer might accept the risk of known PFAS conditions if it thinks levels are safe for human health and the environment, she adds. ‘If not, they may consider a policy exclusion.’ Where there is known or likely PFAS contamination, environmental insurers usually apply a PFAS exclusion on a case-by-case basis. ‘This is driven by uncertainties around how to clean up PFAS,

what the remediation costs will be, what clean-up standards will be applied and what additional liabilities could arise,’ says Mok.

Managing the risks

Initially, most PFAS claims revolved around personal injury, but now most claims are related to diminution in property value or inability to use a property, explains Wild. ‘So, someone might say they’ve got a water bore on their property and because the groundwater is affected by PFAS, they can’t use that bore to water their vegie patch or whatever else they might be using it for, and so they bring a claim on that basis,’ she says. For businesses looking to buy a site that has a history of industrial activities, Mok recommends being aware of the potential problems and proactive about identifying them. ‘Seek advice from an environmental consultant as to the environmental condition of the site,’ she says. For businesses that own a site with PFAS contamination, it’s important to look at implementing a plan to minimise harm from the contamination, understand the regulatory obligations and seek advice from an environmental lawyer.

‘Different jurisdictions around the globe are still considering what the impact might be and the best response,’ says Studdert. ‘Different approaches have been taken. Each site and each case is different. But generally the response is a precautionary approach to ongoing exposure and management.’ There’s still a long way to go before the scope of the problem is defined and there is a consistent or agreed response. What’s essential is to have access to the best information available and the right technical expertise to assist in defining, understanding and managing the exposure and to respond accordingly.

ALEXANDRA CAIN Freelance journalist

‘It will be hard to get a real feel for the gravity of this problem until the science is settled. Hopefully, PFAS are not something we’ll be dealing with for decades to come.’

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

AGING WORKFORCE by Domini Stuart Illustrations by Cami

Beating the

brain drain The decision-making skills insurance professionals need to excel are often developed over decades of experience. So, what happens when older workers retire and take this expertise with them?

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

PPY

R E TIRE

T N ME

‘It’s a real concern for the industry that so few respondents have a plan for retaining older talent or capturing their expertise.’ Rebecca Slingo / ANZIIF

IN SHORT › ANZIIF’s Aging Workforce

Study suggests that, while many insurance professionals expect to lose skills and experience as older workers retire, few have taken steps to manage that risk.

› Some younger workers

regard older workers as a threat to their own advancement and distrust their grasp of technology.

› Artificial intelligence can now be used to replicate human expertise — a valuable tool for decisionmaking and training.

s the population ages, many in the insurance profession are concerned about the risk of ‘brain drain’ or the loss of organisational knowledge and relationships as older workers retire. In fact, according to ANZIIF’s Aging Workforce Study, nearly 80 per cent of organisations expect to lose valuable skills and knowledge — yet only 11 per cent have made any attempt to plan for those losses. ‘It’s a real concern for the industry that so few respondents have a plan for retaining older talent or capturing their expertise,’ says Rebecca Slingo, ANZIIF’s general manager, learning. ‘Insurance professionals are valued for the quality of their decision-making, which is based on years of experience working in grey areas. It’s not something you can learn overnight. People need opportunities to develop and grow their skills through both formal and informal learning experiences.’ The danger of skills loss is most evident in certain specialist areas.

‘Some do tend towards longer tenure, including risk surveyors, loss adjustors and underwriters,’ says Catherine Dixon, executive general manager, people experience, at Suncorp New Zealand. ‘A number of employees in these areas with extensive institutional knowledge are nearing national superannuation age. ‘We have to work carefully on succession planning and talent acquisition strategies to make sure we are identifying, developing and retaining employees who can fill those specialist disciplines.’ Leadership is also under threat. Deloitte’s Human Capital Trends in the Insurance Industry report found that insurance sector executives consistently rate leadership as a top human capital concern. ‘Given the many factors contributing to a volatile landscape in the insurance sector — including regulatory uncertainty, an increasingly challenging cyber environment and evolving customer needs — having effective leaders who can provide strategic clarity is crucial,’ the report states. ‘This conclusion is reinforced by a 2015 survey ANZIIF.COM // ISSUE 03 2020 // JOURNAL

AGING WORKFORCE

KEY INSIGHTS

ANZIIF AGING WORKFORCE STUDY

Nearly 80% of companies expect to lose valuable skills and knowledge as workers retire

1 in 4 say that age discrimination exists in their workforce

conducted by Deloitte, where 87 per cent of insurance respondents agree that leadership is an “important” or “very important” issue. Yet, only 33 per cent believe their leadership pipelines are “ready” or “very ready” to lead and respond to these business challenges. This gap can impact insurers’ ability to navigate through challenges and it may affect the bottom line.’

Resistance to change Australians are staying in the workforce for longer across all industries. The latest edition of the federal government’s Older Australia at a Glance report revealed that, in January 2018, Australians aged 65 accounted for 13 per cent of the workforce compared with 8 per cent in 2006. And Australians’ changing attitudes to retirement suggest this trend is likely to continue. Over the 12 years to 2016-17, the number of Australians aged 45 and over planning to stay at work until they were 70 rose from 8 to 20 per cent. It’s a similar story in New Zealand, where one in five people aged 65 and over are still working. The government predicts this figure will climb to one in three by 2031. Clearly, retaining older workers could help to fill a growing skills gap. They could also help insurers stay relevant for an aging customer base. Yet some face discrimination from younger employees who assume mature age workers lack skills in technology or that the older generation is impeding the career development of younger counterparts. ANZIIF’s Aging Workforce Study found this concern was more pronounced in China JOURNAL // ISSUE 03 2020 // ANZIIF.COM

1 in 5 organisations have formal policies in place to prepare for an aging workforce

and South-East Asia, though companies such as Prudential Corporation Asia are working to change this thinking. ‘In 2018, we were the first financial institution in Singapore to remove the official retirement age for our workforce,’ says a Prudential Corporation Asia spokesperson. ‘We are also helping our workforce stay competitive and relevant so they can enjoy extended careers by encouraging them to upskill with courses in artificial intelligence, innovation and entrepreneurship.’ In Malaysia, Prudential’s reverse mentoring program enables younger employees to coach their senior colleagues in areas such as social media. ‘We hope this will enhance workplace diversity and encourage innovative thinking as it promotes collaboration among all generations of our employees,’ the spokesperson adds. Prudential has also been developing a futureready workforce and encouraging employees of all ages to embrace a digital mindset. As a result, they were well prepared to meet the challenges of COVID-19. At the height of community quarantines and lockdowns, as many as 11,800 Prudential employees across Asia were working from home.

Pioneering recruitment and retention Suncorp New Zealand runs a number of initiatives to attract and retain mature age workers. ‘We are using targeted recruitment for different generations to attract people across a wide range of ages,’ says Dixon. ‘In terms of retention, we have a huge focus on flexible working. This lends itself well

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More than half say more flexibility would encourage them to stay in the workforce longer

Two thirds believe mentoring is the best way to pass on skills to younger colleagues

to mature age workers who want to work a few hours from home or periodically in a progression towards retirement. ‘We also invest heavily in reskilling all of our employees and helping them to proactively manage their career, wellbeing and financial security irrespective of age. As a result, our workforce is currently 16.8 per cent mature age workers — well above our target of 13 per cent.’ Franz Josef Hahn, chief executive officer of Hong Kong-based reinsurance specialist Peak Re, says experienced workers are vital to nurturing young talent in the industry. ‘Our internship program is an important initiative that we see as impacting our talent pipeline and providing valuable experience to the younger generation, as well as promoting our industry,’ he says. ‘Every year, we provide training opportunities, both internal and external, to our employees, especially high-potentials and senior managers.’ ‘We have found the experienced ones are often the educators and the younger ones are the innovators.’

DOMINI STUART Freelance business journalist

‘It’s ironic that an industry built on managing risk appears oblivious to the danger of losing expertise and skill. With five different generations in the workforce, the insurance sector has a great deal to gain from fostering a culture of inclusivity, curiosity and respect, along with emerging technology.’

DECONSTRUCTING DECISION-MAKING Artificial intelligence (AI) is providing an innovative solution to capturing expertise.

South African-based Merlynn Intelligence Technologies has created a technology that can digitise human expertise, allowing people to create a virtual version of themselves replete with experience and technical skills, as well as tacit knowledge such as instinct, empathy and ethics. ‘When someone is planning to retire, we can use our AI to clone their expertise and positively support their transition,’ says Jacqui Jordan, consulting lead at Merlynn. ‘By deconstructing the way they make their decisions, we can enable them to make their intellectual property available to other people in real time.’ This model can also relieve bottlenecks when an experienced professional decides to work part-time and can even help to train new recruits. ‘It can sit silently in the background until there’s a questionable decision that requires expert support or review,’ says Jordan. ‘We’re also seeing that, as basic high-volume processes become increasingly automated, there are fewer entry-level roles for newcomers to cut their teeth on. This is a way for them to learn from the best in the industry.’ It seems that the industry could be saved from a brain drain by a technological brain share.

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

PROFILE

Yong Seek Ying Story Lucy Siebert

The science of risk An engineering background has proven pivotal to Yong Seek Ying’s success in identifying and managing risks for businesses navigating the ‘new normal’.

n the early days of the COVID-19 pandemic, businesses around the world discovered that shutting down their operations was a whole lot more complex than simply sending staff home and switching off the lights. In fact, hibernation — and the subsequent restart — has presented numerous risks, made even more complex due to different lockdowns in every country, as well as the unpredictable spread of the virus. Singapore-based Yong Seek Ying, FM Global’s Asia Pacific division engineering manager, has been right there with her clients, assisting them through this once-in-a-century process. Yong is a qualified engineer who has worked with the property insurer for nearly two decades. FM Global applies a non-traditional engineering-based approach to risk management, with all evaluations based on information from engineers on site. However, the scale of the pandemic is unlike anything Yong or her team have ever experienced. The pandemic has ‘put a lot of unfamiliar risks on the plates of risk managers, including many things that they may not have been prepared for’, says Yong.

OPPOSITE Yong Seek Ying has helped businesses manage the risks of shutting down and then starting back up again during the pandemic.

‘Thousands of facilities were required to shut down and become idle in a very short period of time … [with] very little preparation.’ During the initial pandemic response, Yong worked closely with clients on a broad range of challenges. While some clients were closing down their operations, others were rapidly pivoting their businesses to produce new essential goods — posing a number of new risks along the way. For instance, some manufacturing facilities were repurposed and retooled to produce hand sanitiser, which changed the risk of fire due to the flammable nature of the liquids. Others switched to manufacturing personal protective equipment, which also posed fire risks due to the potential for build-up of lint. Of course, even during a global pandemic, risk managers must continue to plan for risks posed by natural disasters, including bushfires, cyclones and floods. ‘[In May] alone there were two typhoons that passed through Asia,’ says Yong. The response and management of these types of disasters has proven complex. For example, social distancing requirements has meant there is often minimum manpower on site at any one time so resources can be stretched in the event of an

TWO-MINUTE BIO Yong Seek Ying COMPANY // FM Global TITLE // Asia Pacific division engineering manager

EDUCATION

Yong completed a Bachelor of Materials Science and a Master of Environment, Health and Safety Technology at the National University of Singapore. She also has a Graduate Diploma in Business Management from the Singapore Institute of Management.

CAREER

She started her career as a safety engineer, before joining FM Global in 2001. Yong has worked at the company for the past 19 years, including roles as a field engineer and the first female engineering manager for Asia operations.

BEYOND THE DAY JOB

Yong enjoys spending time with her family and is also a supporter of various charities. She has initiated several fundraising activities with FM Global’s social committee team. One of her proudest moments was raising more than S$10,000 by shaving her head to support the Children’s Cancer Foundation signature event, Hair for Hope.

ANZIIF.COM // ISSUE 03 02 2020 // JOURNAL

PROFILE

‘… it’s a job where you are helping ensure that employees are kept safe, customers are happy and business operations keep ticking along.’

emergency. In addition, multi-national corporations are having to navigate the various government regulations and policies from countries that are in different phases of recovery from COVID-19, which can impact the operations of each facility and who is allowed on site. But it is challenges like these that make Yong even more determined to succeed. ‘You’re not in a job where you’re just passing the time — it’s a job where you are helping ensure that employees are kept safe, customers are happy and business operations keep ticking along,’ says Yong. ‘After all, the recent pandemic has shown us just how disastrous major disruption can be on business operations.’

An engineering approach

Yong completed a master’s degree in Environment, Health and Safety Technology and a bachelor’s (honours) degree in Materials Science at the National University of Singapore. FM Global first crossed her radar while she was working as a young environment, health and safety engineer. ‘I was instantly interested in the type of work these engineers did, as well as how this engineering approach to underwriting is fundamental to insurance offerings for clients,’ she says. JOURNAL // ISSUE 03 2020 // ANZIIF.COM

She landed a job at FM Global in 2001 as part of the company’s expansion in the Asia Pacific and has since held a number of different roles, including field engineer, group manager for field engineers and the first female engineering manager for Asia operations. In January 2019, she was appointed to her current role, based in Singapore. Yong believes a number of factors differentiate FM Global from its competitors — namely its approach to loss prevention, which focuses on risk improvement, and its investment in research into new technologies, such as predictive analytics to help prevent specific risks. ‘These technologies can be viewed like a crystal ball that enables clients to see where their potential exposures are and help them focus on minimising potential damage,’ she says.

Diversity and inclusion

Talent development, diversity and inclusion are areas of particular interest for Yong. Globally, engineering remains a male-dominated profession — in Yong’s Asia-Pacific division of FM Global, women hold approximately 20 per cent of the engineering roles. The company’s effort to address this gender imbalance includes a partnership with the Society of Women Engineers. ‘Through this partnership, we’ve seen a significant increase in the number of females who are interested in pursuing careers in the engineering space,’ says Yong. She believes that FM Global’s approach — ‘working for a greater cause to help improve overall business resilience’ — makes the company an attractive employer for newly qualified engineers from across the Asia-Pacific region. However, she concedes the current economic climate is likely to negatively impact job prospects for many ‘promising young people’.

Plan for the future

Amidst challenging health and economic conditions, Yong believes businesses need to look at making permanent changes for a ‘new normal’, rather than hoping for a return to pre-pandemic approaches. FM Global itself has responded to the pandemic by embracing new ways of working. The company offers remote engineering services via virtual meetings, which Yong believes will continue for some time as field activities gradually resume. ‘Without having boots on the ground, we can connect with clients by scheduling virtual meetings to go through any issues they’re facing and what kind of assistance they need — for example, if they are idle or are going to be idle — and the risks associated,’ she says. For this engineer, new approaches and providing clients with assistance are all in a day’s work — pandemic or no pandemic.

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AUTO INDUSTRY by Graeme Adams

Car manufacturers threat or opportunity? Ongoing change and disruption in the vehicle manufacturing industry could signal a welcome easing of competitive tensions between car companies and insurers.

or some years now, motor insurers have been uneasy about the potential for car manufacturers and distributors to underwrite their own insurance products to sit alongside their finance offerings. This poses a threat to all car insurers, but particularly to insurers that white label insurance to new car buyers via car dealers.

Excess capacity, low profitability In both 2018 and 2019, around 100 million vehicles were made worldwide, although that was still below manufacturing capacity. Capacity has been in excess for the past two decades as manufacturers opened up new plants in low-cost countries faster than they closed old ones in more expensive locations. In 2020, no more than 80 million vehicles are expected to be made — with the sharp drop-off primarily (but not entirely) due to COVID-19. Around two million of those vehicles will be electric, with the majority sourced from China. The vehicle manufacturing industry is fragmented with the top 10 companies accounting for 75 per cent of worldwide production. In Australia, there are 58 car brands, but it is likely some will be withdrawn over the next decade in response to poor industry profitability and smallscale economics. The industry has undergone structural change in recent years. Many companies have merged in an attempt to combat poor profitability and the increased cost of research and development required to move away from the internalJOURNAL // ISSUE 03 2020 // ANZIIF.COM

combustion engine towards cleaner alternatives such as electric, and to develop autonomous vehicles. At this point in time, manufacturers lose money on electric vehicles (EVs), so they need to make the profitable internal-combustion engines to fund the research.

Competition for capital The lack of profitability has resulted in historically low market capitalisations. For example, Ford’s market capitalisation on the New York Stock Exchange in April 2020 was lower than Westpac’s value on the Australian Securities Exchange — yet Ford is the world’s sixth largest car maker, producing around five million cars worldwide. While the stock market is saying it isn’t interested in old internal-combustion engine based companies like Ford, it is rewarding Tesla — which has a market capitalisation seven times higher than Ford despite never turning an annual profit. In a post-COVID world, it appears unlikely the car manufacturers can afford to develop electric and autonomous vehicles concurrently, or at least not on their own in the short term. At Finity, we think the demand for electric cars will triumph over the desire for autonomy at this point. Autonomous vehicles will still happen, but we think their development will be delayed for the two reasons outlined in Figure 1 (page 38). Car manufacturers may need to work together and share the costs of developing electric cars. Some are already doing so, with Ford and Volkswagen announcing in 2019 a partnership to develop an electric car in.

IN SHORT › As higher R&D costs and

lower profitability impact the car manufacturing industry, there could be new opportunities for adjacent service providers like insurers.

› Collaboration will play a

key role and could replace competition between car dealers and insurers.

› Motor insurers could work

with car manufacturers to develop seamless and costeffective customer experiences around sales, claims and data monetising.

‘At this point in time, manufacturers lose money on electric vehicles (EVs), so they need to make the profitable internalcombustion engines to fund the research.’

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

FIGURE 1

ELECTRIC VEHICLES OVER AUTOMATION There are two key reasons that we think development of electric vehicles will take precedence over automation.

Complexity: Autonomy is very complex and requires a number of stakeholders to spend billions of dollars on infrastructure. Risk appetite: Autonomy takes the responsibility of driving away from the human and places it squarely on the shoulders of the car manufacturer. Given the already low profitability of the car industry, car manufacturers will be less inclined to take on that risk.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

‘... an increase in electric cars could result in a greater appetite for collaboration with third parties such as insurance companies ...’

AUTO INDUSTRY

The continued increase in EV production is dependent on environmental regulation and on continued subsidisation of electric cars in China.

The impact on insurers

PICTURED Tesla is leading the automotive industry in electronic vehicle production but has never turned an annual profit.

An increase in the penetration of EVs has implications beyond causing a concern for existing internal-combustion engine manufacturers. From an insurance perspective, the cost of insuring EVs is high due to the cost of parts, including the battery. French insurer AXA has determined that some EVs are as much as 40 per cent more likely to sustain damage in a crash than internalcombustion vehicles, because drivers are unused to the performance available from the electric motor. The focus of car manufacturers on improving profitability and re-investing in the core competencies of designing and building vehicles (a necessity further heightened by recent difficulties in their finance arms) will likely mean there will be less of an appetite to grow adjacent services such as insurance. They are also less likely to expand into rideshare services. However, an increase in electric cars could result in a greater appetite for collaboration with third parties such as insurance companies to provide the capability for such services. Because of this, we speculate the limited capital

environment of car manufacturers should reduce the level of ‘threat’ from manufacturers previously felt by insurers.

Competition for customers Insurers and manufacturers compete for customer access in a similar way. There are three common touchpoints with the customer: • marketing and sales transactions / delivery • payments and maintenance • assistance and claims marketing and sales delivery. Arguably, most car manufacturers have brands with more emotional appeal than an insurer, and they have the structural advantage of being at the point of sale when insurance should be discussed. Furthermore, insurers largely compete on price, which is less relevant when a customer is purchasing a new car. Insofar as competing for insurance is concerned, car manufacturers should win hands down. Some car dealers now have seamless digital processes for sales ordering, finance and whitelabelled insurance, facilitating a coherent customer experience. Certain insurers recognise the strength of the car brands in the customer relationship by providing relatively generous commissions on new business

NEW OPPORTUNITIES

There are several major considerations for car insurers:

1 White-labelled insurance

Insurers could position themselves as suppliers of white-labelled insurance competence that is integrated throughout the manufacturer’s value chain. This business model requires core competencies such as accurate pricing (in the absence of the ability to select risks, possibly using telemetry) and highly efficient processes, including claims. It could extend to the use of selected or dedicated smash repairers and access to discounted genuine parts.

2 Direct customer access

Alternatively, insurers could focus on direct customer access with competencies in customer intimacy, service aggregation (for example, road service and rental cars) and claims. This could require a more sophisticated approach to technology, such as the use of insurtechs.

3 Telemetry data

Most if not all new cars sold in Australia will have telemetry technology fitted on the production line by the end of 2020. Car insurers should now be considering how they can gain access to it, and how they can best use the data.

4 Influencing electric vehicle design

Car insurers, through their industry associations and research centres such as Thatcham, could influence manufacturers to improve the damageability and repairability of electric vehicles. For example, Tesla does not recommend the repair of any parts on a damaged Tesla. Replacement batteries are also extremely expensive.

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

AUTO INDUSTRY

FIGURE 2

CRUNCHING THE NUMBERS Both car manufacturers and insurers collect data for different reasons:

Manufacturers use vehicle data for: diagnostics direct customer access through apps future developments — a mobility services value chain is possible, including on-demand vehicle provision, usage-based payments, maintenance, assistance and risk coverage.

+ + +

Insurers use vehicle data for: usage-based pricing theft tracking and claims first notification of loss determination of fault future developments — insurers with telematics capability could consider the use of lay-up clauses or premiums based on driven kilometres. Insurers should also be able to take into account changes to the way many people will now work, for example an increase in working from home.

+ + + + +

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

written by dealers (‘if you can’t beat them, join them’). This model is now under threat.

Add-on insurance under fire Following the Hayne royal commission, some insurers withdrew from the add-on insurance market. This meant car insurance could not be crosssubsidised anymore, which ultimately led to increased insurance premiums and put pressure back on dealer commissions for them to remain competitive. Commission income and other payments must now be declared to customers. Also, a number of car companies are quietly dismantling their reliance on their dealer networks by implementing online ordering and payment of new vehicles. This should reduce the involvement of the dealer in the sales process and presumably should mean fewer cross-selling opportunities. To counter this possibility, cars could be sold with a brand name or white-labelled insurance already bundled at the time of purchase. This is not a new idea — it has been done before, but it crashed and burned because the risk carrier had no scope to underwrite. Appropriate technology can now solve that problem.

Payments and maintenance Both car manufacturers and insurers are putting digital processes in place to make transactions easier for customers. There are no apparent competitive tensions here. However, where the sale of the car and insurance are bundled together, the car manufacturer could incorporate the cost of insurance into the car repayments. We understand a number of car manufacturers have legacy issues to overcome before such a proposition can be implemented.

Price tensions over parts If the car manufacturers naturally own the sales space, car insurers own the assistance and claims space. Car manufacturers make much of their profit from supplying parts to smash repairers who then invoice insurers. Prices for parts have been a source of tension between car manufacturers and insurers for years. Insurers have explored a number of different operating models with limited success. The development of independent parts importers that bypass car-branded distribution channels with shorter supply chains may offer a viable alternative to car manufacturers, and the direct competition should result in much-needed pricing pressure.

It is possible that a collaborative arrangement between a car manufacturer and an insurer to provide bundled insurance at the point of sale could also include discounted smash repair part prices. A loop should exist between both parties for the supply of a new car in the event of a total loss.

An explosion of data Most new cars now have the capability to transmit usage data back to the manufacturer. The European Union’s General Data Protection Regulation says data that can be traced back to its owner or driver should be treated as personal data. It is also clear the manufacturers have a responsibility to keep vehicle software and its use up to date. This data stream is valuable to car manufacturers and insurers for different reasons. These are outlined in Figure 2. To date, the monetisation of vehicle data has been sketchy. While it has been possible for after-market telematics devices to be used, they haven’t had cutthrough in the Australian market for a number of reasons. We think telematics is entering a new and more useful phase now that many new cars incorporate telemetry technologies. Car manufacturers will use that data for their own purposes (warranty, product performance, maintenance and so on), and they may also seek to onsell some of that data. That presents an opportunity for car insurers.

Collaboration the way forward In conclusion, we think it is unlikely that car manufacturers will underwrite insurance in Australia in the short term. However, there will be a growing recognition of the benefits of collaborating with insurers where it makes sense to do so — and particularly where there are clear customer benefits (sales and claims, and data monetising). It is likely car manufacturers will merge or collaborate with the continued evolution of personal transportation. And those collaboration skills could extend to working with motor insurers to develop seamless and cost-effective customer experiences, especially around new car purchasing and claims notification, when compared with standalone services. Graeme Adams is a principal at Finity Consulting. He has more than 35 years’ experience in general insurance and leads Finity’s management consulting practice, performing numerous assignments on short-tail claims, including fraud and leakage reviews, strategy reviews and supplier management issues.

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LIFE

IN SHORT › Environmental insurance is designed to provide for the reinstatement of the environment following a pollution or contamination incident.

› Even if the chance of an

adverse event is 1 per cent, without environmental insurance, the entity is still exposed to 100 per cent of the risk.

› Insurers commonly

exclude environmental liabilities, and directors and officers can find themselves exposed if the entity they run is being sued for causing environmental harm.

The case for environmental insurance

Insurance policies do not typically cover reinstatement or remediation of the environment following a loss. But without environmental insurance, a business could be putting all its assets at risk.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

ENVIRONMENTAL LIABILITY by Anthony Saunders

ithout cover, the financial viability or sustainability of any entity — big or small, built or otherwise — is 100 per cent exposed to the full costs of reinstatement. For example, in the case of Hamcor Pty Ltd & Anor v Marsh Pty Ltd & Anor [2013] QCA 395, the cover arranged did not include indemnity for the costs of remediation or reinstatement of the polluted property on or offsite after the insured’s chemical factory burned down. To acquire the correct cover, it is important to first estimate the potential environmental damage following a worst-case loss scenario. A premium is then calculated based on the associated probability or likelihood. Even if the chance of an adverse event is 1 per cent, without environmental insurance, the entity will still be exposed to 100 per cent of the resulting environmental externalities calculated.

Prevention is better than cure

‘Remediation’ is the process of restoration at law and does not equate to reinstatement as a fact. Wide variations in law exist around the world pertaining to remediation of the environment caused by a range of business practices. These variations have a direct impact on the financial outcome of any adverse event that can increase risk exposure. What is legal in one jurisdiction may not be legal in another. Acceptable levels of environmental degradation in one country may not be recognised elsewhere. Further, what we understand to be safe today could well be proved detrimental tomorrow. There is also a school of thought that suggests ‘pollution’ ought to be avoided as

‘fact’ rather than by measures ‘at law’. A chief principle of the Environmental Planning and Assessment Act 1979 (NSW), for example, is the precautionary principle, or the need to take precautionary measures. This is triggered by the satisfaction of two conditions: a threat of serious or irreversible environmental damage; and scientific uncertainty as to the nature and scope of the threat of environmental damage. When both conditions have been satisfied, a precautionary measure should be taken, but it must be proportionate to the level of the threat.

Environmental exclusions

Insurance companies commonly exclude any claims resulting from damage or losses that arise from pollution, environmental protection and climate change. This is no surprise, because to provide cover for any such event without understanding the risks would be reckless. Specifically, directors and officers are exposed to liability if the entity they run is sued for causing environmental harm. Exclusions would also extend to shareholder action if precautionary measures were not taken to estimate a worst-case potential environmental disaster. Continuing without standalone environmental insurance can therefore be considered irresponsible.

BUSINESSES AT RISK Some of the sectors that need environmental insurance include:

+ Service stations + Tyre stockists and

manufacturers + Dry cleaners + Cement manufacturers + Waste tips + Refineries + Coal mines + Paint manufacturers + Hairdressers + Nail parlours + Fireworks and explosives manufacturers

Lawful business practices

The discussion here is not about wilful damage or deceitful conduct. Certain industries create environmental degradation that may be unavoidable under current accepted and lawful business practices. Industries such as open-cut coal or gold mining or businesses such as petrol stations (with their underground fuel storage tanks) PICTURED

‘On 20 April 2010, the largest oil spill of all time occurred from an oil rig in the Gulf of Mexico and the subsequent fines and penalties have exceeded US$54 billion.’

Controlled burns were conducted following the BP Deepwater Horizon oil spill disaster in 2010.

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

ENVIRONMENTAL LIABILITY

PROVIDING MORE CLARITY The Australian Accounting Standards Board responded to the International Accounting Standards Board Exposure Draft Measurement of Liabilities in IAS 37. The exposure draft adds guidance specifying more precisely how entities should measure the effects of their practices and how they should achieve that aim. The requirements specify that a contract is ‘onerous’ when the unavoidable costs of meeting the contractual obligations — that is, the lower of the costs of fulfilling the contract and the costs of terminating it — outweigh the economic benefits.

can have a negative environmental impact on their surroundings. Our modern lifestyle requires oil, gas, ethanol, electricity, sugar, paper, building materials, water and fresh produce. The waste by-products or the negative environmental impacts resulting from the production of the goods we consume are rarely disclosed.

to reduce any future liabilities associated with a predictable level of potential environmental damage. In their 2009 review of the Environment Protection and Biodiversity Act 1999, Allens Arthur Robinson and Bill McCredie wrote: ‘The position is normally quite clear [in terms of] whether something will or will not require referral. It’s a question of fact.’

Serious or irreversible damage

A matter of conscience

The reality is that even if a project is sustainable as a matter of law, it may not be sustainable as a matter of fact. And if a project at law turns out to be unsustainable, environmental insurance (if arranged correctly) can provide an indemnity up to the estimation of worstcase loss scenario. Familiarisation of loss estimation methodology at micro and macro levels is essential as it shifts attention to the ‘assets’ of the responsible entity that are 100 per cent exposed without environmental insurance. Despite the threat of serious or irreversible environmental damage as a matter of fact (but not at law), there is no legal obligation on a responsible entity to reduce or restrict the environmental impact of a development. However, knowingly contributing to serious damage to the environment may result in future environmental law liabilities, including criminal prosecution. It would therefore be advisable for prospective proponents to get legal advice JOURNAL // ISSUE 03 2020 // ANZIIF.COM

Current social conscience is concerned with the environment, and therefore it’s in the interests of industry and business to share these sentiments, including those involved in resource exploration and development. On 20 April 2010, the largest oil spill of all time occurred from an oil rig in the Gulf of Mexico and the subsequent fines and penalties have exceeded US$54 billion. The rig itself was insured; however, if the explorers had exercised the precautionary principle prior to exploration and estimated the physical and social cost of the environmental uncertainties, they may have considered safer alternatives.

Ignorance to exposures

Directors and officers may be unaware that they are not commonly covered for the mistakes they could make or contribute to. This can result in having no financial means to restore the environment to legal satisfaction. Without environmental insurance, such businesses may be considered as

conducting themselves with an element of reckless regard for the environment or ‘self-insuring’. This may result in their environmental liabilities exceeding the full extent of the liquidated asset value of the business. Environmental insurance is designed to provide for the reinstatement of the environment where it may be required to respond to inherent and unforeseen liabilities that can potentially befall stakeholders or their principal entities. One Lloyd’s broker has developed a branded product range to set an environmental insurance benchmark. The covers are available and getting easier to understand and explain to policyholders and recipients.

‘The more we move to a transparent quantification of environmental risk, the more we can underpin the sustainability of those businesses that have uncertain environmental liabilities.’

The more we move to a transparent quantification of environmental risk, the more we can underpin the sustainability of those businesses that have uncertain environmental liabilities. Environmental insurance achieves a transparent understanding of risk and transfers that risk from balance sheet to insurance policy.

Anthony Saunders is an insurance broker who specialises in identifying environmental liabilities and creating environmental sustainability through insurance covers. He is the director of EnviroSure, an internationally recognised professional indemnity insurance product that includes pollution risks.

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REINSURANCE //

CLAIMS //

GENERAL //

RISK //

Walking the tightrope

Losing its shine

The road less travelled

Cracks in PI cover

The pandemic is making its presence felt on both sides of reinsurers’ balance sheets.

Between valuation issues and sentimental customers, jewellery claims are becoming more complex.

COVID-19 sent global travel into a tailspin. How can insurers map a route to recovery?

PI insurance for the construction industry is hardening, but there are ways to mitigate exposures.

66 BROKING // Hacking the cyber sell

Why brokers play a vital role in helping customers protect themselves against the growing risk of cyber attack.

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

Pandemic impact

REINSURANCE

by Zilla Efrat

COVID-19: Walking the tightrope As the global reinsurance sector continues to take hits from the COVID-19 crisis and other factors, we take a look at how reinsurers are responding to risks on both sides of the balance sheet.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

or reinsurers, the beginning of 2020 was looking challenging enough. The sector had already endured several years of large natural catastrophe losses and plenty of fierce competition. According to S&P Global Ratings’ Melbourne-based credit analyst Michael Vine, the reinsurance sector has struggled to earn its cost of capital since 2017. 2019 was particularly rough, affected by the likes of Hurricane Dorian in the Atlantic, two typhoons in Japan and devastating fires in Australia, the United States and elsewhere. Then COVID-19 struck, taking its toll on the sector’s investment returns, claims and underwriting results. According to Fitch Ratings, these factors will limit reinsurers’ earnings in 2020, but losses are expected to be manageable. Indeed, Siew Wai Wan, senior director of APAC insurance at Fitch Ratings, views the reinsurance sector’s resilience favourably. ‘It’s benefited from a trend of recent price improvements, very strong capital adequacy going into 2020, robust risk management and generally solid business profiles,’ he says.

Investment market woes

IN SHORT › Stock markets have

rebounded, but another big equity slump, a ratings migration, corporate bond defaults or falling interest rates could affect reinsurers’ returns going forward.

› A host of factors are helping

reinsurers secure price rises at renewals. ›C OVID-19 is likely to prevent reinsurers from meeting their earnings expectations or earning their cost of capital in 2020.

The spread of COVID-19 created significant investment market volatility and caused global equity markets to slump in the first quarter of 2020. According to Moody’s, this drop, together with wider credit spreads, had dented the total shareholders’ equity of the reinsurers it reviews by 14.4 per cent by end-March. Since then, equity markets have rebounded and credit spreads have tightened. But Carlos Wong-Fupuy, senior director of global reinsurance ratings at AM Best, notes that most reinsurers have relatively conservative investment strategies with low equity risk exposures. ‘This is partly due to regulatory pressures, with regulators demanding they put up more capital to back up riskier assets.’ As a result, Wong-Fupuy says reinsurers are generally more invested in high credit quality, liquid bond portfolios. Given this, John Philipsz, CEO of Willis Re Australia, warns that a ratings migration, defaults on corporate bonds, a decline in interest rates or a big move into cash could affect reinsurers’ returns going forward. He estimates that the hit to reinsurers’ capital

bases from investment markets is around 7 per cent, or US$38 billion. ‘This estimate had been 20 per cent, or US$110 billion, as of late March, which illustrates how volatile the situation is,’ he says.

Rates: onwards and upwards On the positive side, reinsurers’ underlying underwriting results should benefit from price rises in 2020. One factor behind the price increases in certain US casualty lines is ‘social inflation’ — that is, the impact that factors such as litigation funding, class-action lawsuits and public distrust of corporate defendants have had on insurance claims in recent years. Wong-Fupuy says that as a result of these pressures, as well as several years of catastrophe losses and large events, reinsurers started to see some improvements in rates in 2019. ‘Fortunately, that trend has been strengthened and we have seen this in the January 2020 renewals and later in April and July,’ he says. S&P confirms this firming trend, adding that the increases were necessary given 2019’s natural catastrophe losses, prior years’ natural catastrophes loss creep and scarcity of retrocession capacity.

A different breed of claims Claims in 2019 were mostly related to physical catastrophes, but everything changed with the arrival of COVID-19. Vine says losses now largely include event cancellation claims, but reserves have been set aside for business interruption, directors and officers, credit and travel insurance. Losses from these — together with losses from other lines such as aviation, errors and omissions, and workers compensation — are expected to grow as COVID-19 takes its toll on many economies. ‘Fortunately to date, the life insurance industry’s exposure to mortality has been low and manageable,’ says Vine. ‘However, we would expect greater propensity for disability income claims under trying social and economic conditions. ‘In key areas, those exposed to COVID-19 appear to be the elderly or lower socioeconomic groups, based on their work profiles, so they are less likely to have material life insurance cover. ‘That said, some areas of property claims could fall because more people are working from home and travelling less. This, for example, could lead to fewer motor accidents and burglaries, and people observing things around the home like water leaks.’ Philipsz says that an early consensus on

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

REINSURANCE

have a portion of their investment portfolios in cash and liquid investments, such as money market funds or bonds with maturities of less than one year. ‘In some markets, regulators have also encouraged or potentially forced financial services companies not to pay cash dividends to maintain cash and liquidity,’ adds Greg Carter, AM Best managing director, analytics, based in Singapore. ‘We have seen some reinsurers do this as well. There’s an element of stockpiling cash to prepare for potential new challenges ahead.’ In addition, Moody’s notes that many reinsurers have suspended share buybacks to preserve capital, given the economic uncertainty and ahead of the hurricane season.

Retrocession markets harden

ASSET-SIDE SHOCKS TO REINSURERS’ BALANCE SHEETS Rather than potential claims, by far the more visible impact is coming from investment markets, according to Willis Re. These include:

Collapse of equity markets. S&P 500 — 14 per cent year to date.

Widening credit spreads. For example, falling corporate bond prices; US and European investment grades have recovered to be roughly flat year to date, while high yield is down about 10 per cent.

Increase in volatility. For example, the VIX (CBOE volatility index), which hit an all-time high of 83 on 16 March.

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COVID-19 industry loss estimates is emerging, with a broad range of about US$30 billion to US$100 billion. ‘Given the complexity of the loss,’ he adds, ‘it is not surprising that individual company booked losses vary significantly, with the impact ranging up to 10 per cent of shareholders’ equity.’

Changing sources of capital Wong-Fupuy says another trigger for rate rises was the flight to quality of alternative capital. ‘Third-party or alternative capital providers have become more selective in the types of reinsurers they will support following adverse claims experiences in previous years,’ he says. ‘At the same time, we have seen some increased appetite from equity investors, and there have been several cases where companies have raised additional capital or subordinated debt.’ Fitch estimates that more than US$5 billion in new equity funds has been raised over the past few months. ‘Publicly traded re/insurers have raised billions from secondary offerings, while privately held firms have raised capital from existing shareholders, debt issuance and recapitalisation backed by private equity [PE] firms,’ says Wan. He also predicts reinsurers will utilise additional tie-ups with PE companies and sidecars to raise and deploy capital and scale their existing businesses, rather than relying on start-ups or new market entrants ‘given the inherent challenges’.

Cash is king To support their short-tail businesses and balance sheets, Wan says many reinsurers

Wong-Fupuy says the retrocession markets have been hardening faster than the insurance market. ‘Retrocession has predominantly been covered by third-party capital,’ he says. ‘Retrocession from a cedant’s point of view is also becoming a bit more difficult to obtain. It’s more expensive, so some reinsurers are having to retain a bit more risk.’ Jerome Haegeli, group chief economist at Swiss Re, says the retrocession market already showed signs of reduced capacity at the January 2020 renewals, which translated into rate increases of 20–30 per cent. ‘We expect to see a new equilibrium of supply and demand, based on the new realities in the post-COVID world,’ he adds.

The APAC situation Haegeli says reinsurers in Asia Pacific are taking stock of the impact of natural catastrophe losses from the past two years, in particular due to typhoons Faxai and Hagibis in Japan in 2019, and this has resulted in further rate hardening in related business lines. ‘At the same time, primary insurance business growth in Asia remains better than other regions, thus reinforcing the belief that Asia offers better growth opportunities for reinsurers, at least in relative terms,’ he says. Carter notes that reinsurers in Asia Pacific have probably been more sensitive to pandemic risk than those in Europe or the US. ‘They are more likely to have had tighter wordings because of their experiences with SARS [severe acute respiratory syndrome], MERS [Middle East respiratory syndrome] and so on,’ he says. ‘You also have a number of local or regional reinsurers in Asia Pacific that are very much focused on their domestic markets.’ For them, there may be good news. ‘From an economic perspective, the larger

‘There’s an element of stockpiling cash to prepare for potential new challenges ahead.’

POTENTIAL SCENARIOS

Greg Carter / AM Best

Willis Towers Watson used historical events to approximate the societal and financial impact of COVID-19, mapping its future trajectory in four scenarios. Type

Proxy events

Confirmed cases

Confirmed deaths

Duration (years)

Social

1918 Spanish flu

500M

17M —100M

Social

1957 Asian flu

Unknown

1M — 4M

Social

2002 SARS

8,000

800

Social

2019 COVID-19: WTW scenario #1: Optimistic

540,000

0.5

Social

2019 COVID-19: WTW scenario #2: Moderate

390M

Social

2019 COVID-19: WTW scenario #3: Severe

1.2B

10M

Social

2019 COVID-19: WTW scenario #4: Limited Success

5.9B

96M

Unknown

Economic 1929 Great Depression

N/A

3.5

Economic 2008 Global Financial Crisis

N/A

1.5

Source: COVID-19 Willis Re Report 1st Edition

and more developed Asian markets appear to be rebounding ahead of some other regions,’ says Vine. ‘There is also arguably less exposure to the legal interventions such as class actions than you see in Europe or the US. ‘Overall, Asian markets do seem to be handling the pandemic more effectively than others and they have come out of the economic cycle a bit quicker. And, the return to work is closer to normal than in the US and some European markets.’

Positives and negatives Both Fitch and S&P have revised their outlooks for the global reinsurance sector to negative (from stable) because of COVIDrelated concerns. S&P sees COVID-19 preventing the sector from meeting its earnings expectations or earning its cost of capital in 2020. ‘But it’s fair to say the top 20 reinsurers are at least an A or stronger rating,’ says Vine. ‘They have generally benefited from the risk management lessons from the global financial crisis — for example, in terms of managing low interest rates, having more liquid asset portfolios and relying less on derivatives. ‘There are probably just a few of the broader reinsurers that may face difficulty. It’s really those outliers that entered 2020 with an already weaker performance or that are more exposed to larger business lines affected by COVID-19 or that have a slightly riskier asset portfolio. But these would be in the minority.’

Vine says that, globally, S&P has downgraded two reinsurers since February because of COVID-19 and oil price dislocations: Aspen Insurance in March and Toyota Reinsurance in May. ‘Globally, across the broader insurance sector that we rate, there have been 45 negative rating or outlook revisions to date, 17 of which are from the Asia-Pacific region,’ he says. ‘The 45 insurers represent 16 per cent of our rated insurance portfolio, which is one of the least affected sectors to be impacted by the pandemic / oil price event, relative to other corporate and sovereign sectors.’ For its part, AM Best has kept its outlook for the global reinsurance market as stable since 2018. ‘There are some positives and some negatives and they tend to cancel each other out,’ says Wong-Fupuy. ‘In many cases, reinsurers are still in a strong capital position. Some have experienced pressure on their underwriting performance, but that pressure doesn’t necessarily translate into ratings actions. ‘Some are better positioned because they are more diversified or better able to take advantage of improved market conditions. But there are also some that have a more limited business profile or more exposure to investment risk. They will probably suffer.’

An uncertain future Wong-Fupuy says COVID-19 is more about uncertainty than anything else. ‘COVID-related losses seem to be well contained,’ he says. ‘In terms of magnitude,

they seem to be comparable to an active hurricane season. Having said that, it’s an event that hasn’t finished yet. Going forward, companies are trying to manage that risk by limiting cover and applying exclusions.’ Philipsz says future uncertainty centres around COVID-19 claim payments, with litigation potentially prolonging the uncertainty for many years as various pieces of legislation make their way into law and the numerous inevitable appeals from insurance companies are heard in court. Haegeli, meanwhile, cites other factors clouding the future. ‘In our baseline, we expect the global economy to recover in 2021, although the recovery will be incomplete with globally lost output to pre-COVID-19 trends in the order of US$12 trillion,’ he says. ‘Nevertheless, at this point of heightened uncertainty, COVID-19 is still severe in some emerging markets and it also depends on what lockdown exit measures are taken.’

ZILLA EFRAT

The Journal editor

‘Just how COVID-19 will affect reinsurers’ balance sheets will remain uncertain for some time to come as some countries face new waves of infection and legal challenges and appeals are heard on claims outcomes.’

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

Jewellery insurance

CLAIMS

by Zilla Efrat

Losing its shine The complexities of jewellery cover Diamonds are forever, which is just one of the reasons jewellery claims are considered one of the most challenging areas in general insurance for insurers, brokers and customers alike.

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IN SHORT › Jewellery claims are

generally difficult and complex to manage and can result in dissatisfied claimants.

› There are many and varied

reasons for this, and much depends on valuations and the type of policy involved.

› Fraudulent claims and

customers’ emotional attachments to their jewels add extra complications.

hile the ins and outs of jewellery insurance differ greatly across the AsiaPacific region, there is one consistency: for many insurers, jewellery claims are a notoriously difficult category to manage. And they can easily result in a negative experience for claimants if handled poorly. That’s the view of Matthew McHutchison, managing director of Independent Validation Advisory Australia (IVAA), the winner of ANZIIF’s Service Provider to the Insurance Industry award in both 2019 and 2018. McHutchison says there are stark differences in how jewellery industries operate and are regulated from country to country, as well as regional variances in jewellery insurance policies and how claims are settled, each affecting client and industry outcomes. ‘Although there are some similarities, the Australian industry is very complex and uniquely different to that in New Zealand and therefore claim management must be applied differently,’ says McHutchison. ‘For example, in our experience, many insurers in New Zealand settle a jewellery claim on the second-hand value, which is uncommon in Australia. However, there are some overlapping trends, such as a growing number of New Zealand and Australian insurers focusing on reducing cash settlements and promoting “new for old” replacements.’

A complex area for claims

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There are many reasons why jewellery claims are often considered more complex and challenging than other areas in general insurance. ‘One is that jewellery is often very customised. Another is that it’s kept for a long period of time,’ says Matt Williams, executive manager, claims services, at Vero New Zealand. ‘Also, a like-for-like product is not usually available on the market in the same way

‘Jewellery has huge emotional and sentimental value to its owner in the way a TV or toaster do not.’ Kevin Whelpton / JAA Insurance Services

that you can generally replace a TV with a similar TV, for example.’ For Kevin Whelpton, a director of JAA Insurance Services, dealing with distraught customers is the biggest challenge when handling jewellery claims. ‘Sometimes their jewellery has been lost in horrible circumstances — a home burglary, a bag snatch or a house fire,’ he says. ‘Thefts often occur on holiday in foreign countries and this adds complications with obtaining police reports or investigations by assessors. No two jewellery claims are alike and every client’s jewellery is uniquely important to them. ‘Jewellery has huge emotional and sentimental value to its owner in the way a TV or toaster does not.’ For L.F. Ong, a Malaysian loss adjuster who has specialised in jewellery block insurance claims for 25 years, the complexities are created by the obligatory procedures involved in a jewellery claim. ‘The step-by-step approach of the procedures are actually a trade secret of the claims practitioners,’ he says. ‘The most common problems arise when the claimant or claims practitioner do not adhere to the procedures.’ ANZIIF.COM // ISSUE 03 2020 // JOURNAL

CLAIMS

Types of cover A great deal depends on what sort of policy the jewellery is covered by. In Malaysia, for example, customers can obtain either a specialist policy that is marketed by specialist international brokers or a general policy covering home and contents direct from an insurer. Both are markedly different and Ong likens them to ‘apples and oranges’. Whelpton notes that customers in Australia are increasingly able to purchase add-on insurance, which is underwritten by specialist jewellery insurers at the point of sale in jewellery stores. But in the majority of cases, personal jewellery is usually covered by customers’ home and contents insurance policies. Unlike other items in these general insurance policies, he says there’s typically a specific limit of cover for jewellery, normally around A$3,000 per item. ‘Customers frequently don’t specify high-value items in their contents policies,’ he adds. ‘This means that in the event of a claim, they are only entitled to a set value within their policy, which is often significantly lower than the value of the item they have lost.’ Whelpton says that while there are plenty of homeowners’ insurers out there with policies that cater for special or valuable pieces, many don’t. This is particularly relevant for clients who have customdesigned and handmade pieces. ‘Many homeowners’ insurers, particularly those catering to the more “mass market” segment, use their own “panel jewellers” to replace lost or damaged items. But most customers want to return to their own jeweller for a replacement,’ he says. ‘Sometimes in frustration, the customer will ask the insurer to cash settle their loss. This is where things often turn sour. Many homeowners’ insurers will refuse to cash settle or, if they do, they will only offer what their panel jeweller quoted to replace the item. This is often insufficient for a specialist jeweller to handmake a replacement piece.’

Valuation headaches Williams says one of the biggest challenges in handling a jewellery claim is that the value of an item can vary quite substantially. ‘A diamond ring in a photo could be worth $2,000 or $100,000,’ he says. ‘It depends on the characteristics and quality of the materials, and these need to be quantified by an expert.’

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For this reason, he says it is vital that customers have up-to-date valuations so that the insurer can determine the details of the item, its value and the fact that it was in the customer’s possession. ‘Without a recent valuation, it can be difficult to confirm these details and it’s harder to agree on a cash settlement outcome,’ says Williams. But insurance valuations are a contentious topic, according to McHutchison. ‘Not everyone in the jewellery industry understands or agrees with the purpose of valuations,’ he says.

‘A diamond ring in a photo could be worth $2,000 or $100,000.’ Matt Williams / Vero New Zealand

‘In the majority of cases, what we see is jewellery insured for its “replacement value”, yet the valuations on which this is based are set at the higher “retail value” and this can cause the claimant confusion and disappointment during procurement.’ He explains that jewellers sometimes give inflated valuations so customers believe they have secured a significant discount with their purchase. ‘IVAA recommends customers obtain independent valuations for insurance purposes to ensure realistic protection against theft, loss and damage,’ he says. Complicating things further is that the value of jewellery is relatively elastic. ‘The price of gold changes all the time and diamonds are bought in US dollars, so commodity and exchange rates have a big impact on the shifting value of jewellery,’ says McHutchison. ‘The cost of labour can also vary, and throughout South-East Asia, jewellery prices are unregulated so retail prices can be whatever the jeweller wants.’

Risky business McHutchison says jewellery is considered a high-risk item. ‘That’s mainly because it’s a target for theft. It’s also high-value, portable and often subject to fraud,’ he says.

‘The most common insurance fraud is believed to be padding of the claim. At IVAA, we have a team member who specifically focuses on high-risk assessments. There are also a lot of advancements happening in the jewellery claims space because of fraud and our increased awareness of its prevalence.’ Whelpton agrees that fraudulent claims are not uncommon. ‘Jewellery is easy to “lose” and claim for,’ he says. ‘Rightly, there is a very high standard of proof required for an insurer to deny a claim on grounds of fraud, as enshrined in Briginshaw v Briginshaw. However, proving fraud is often almost impossible for jewellery insurers. It is almost impossible to prove a loss did not happen when a covered claim can be as simple as “my ring fell off in the ocean when I was swimming”.’ McHutchison adds that insurers often have to rely on the customer’s word when it comes to claims, but proof of ownership is also important to reduce fraud and achieve accurate validations. ‘A challenge is that a lot of jewellery is handed down,’ he says. ‘Proof of ownership traditionally involved photos and receipts, but our focus has expanded to cross-referencing these with original suppliers, thereby increasing the accuracy and reducing the guesswork.’ Whelpton says a rise in electronic claims lodgement helps to speed up and streamline the claims handling process. But he adds: ‘Unlike general household contents claims, jewellery claims revolve around the customer working with their jeweller to replace their special item. This will always remain a very personal and human claims process — and we hope it remains that way.’ Despite all the complexities, McHutchison stresses that the jewellery claim sector is undergoing positive change. ‘It has a positive future as it continues to focus on its traditionally challenging components,’ he says.

ZILLA EFRAT

The Journal editor

‘Better education and communication with customers about to take up insurance that covers jewellery might improve claims outcomes for everyone.’

PANDEMIC PUTS JEWELLERY INSURERS BETWEEN A ROCK AND A HARD PLACE The COVID-19 pandemic has introduced huge challenges for jewellery insurers, says JAA Insurance Services director Kevin Whelpton. Firstly, it has had a massive impact on the jewellery industry. According to the World Gold Council (WGC), the pandemic slashed jewellery demand as governments across the globe imposed lockdown measures. Precious metal mining was halted, tourism came to a standstill, customers went into lockdown and many retailers shut their doors. In March, jeweller Michael Hill became the first major Australian retailer to close its stores. The company’s outlets in New Zealand suffered the same fate. The WGC says demand fell to the lowest on record in the first quarter of 2020, led by a 65 per cent decline in China — the largest jewellery consumer and the first market to succumb to the outbreak. In India, jewellery sales are expected to drop 25 per cent in the financial year 2021 as a result of the COVID-19 restrictions and overall reduction in disposable income. According to India Ratings and Research, the lockdowns dented jewellery demand, which is primarily driven by the marriage season and festivals in the first quarter.

‘Gold and diamond prices are set in US dollars, and this is going to make jewellery replacement within sums insured ever more difficult,’ he says. ‘Some policies allow a margin for increases in value, but even these may not be sufficient in the current climate. Further, [with economic conditions deteriorating] many people will see jewellery insurance as a non-essential item in the household budget and we expect to see a large number of policies cancelled or non-renewed.’ The challenges imposed by the COVID-19 pandemic prompted Independent Validation Advisory Australia (IVAA) to initiate a support service for jewellers. ‘As we were entering the COVID19 lockdown, we were seriously concerned about the impact on the jewellery industry,’ says IVAA managing director Matthew McHutchison. ‘We built a platform — the Remote Concierge Service — to help promote jewellers to claimants and insurers during this period. ‘This helped customers identify which jewellers were able to provide a virtual consult service and delivery option for their claim. The results exceeded our expectations and we saw most customers still opt to fulfil their claim with jewellers.’

Like other currencies, the Australian dollar dropped significantly against the US dollar and the price of gold has risen significantly over the past few months, notes Whelpton.

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56 54

Travelinsurance insurance Travel

GENERAL GENERAL

bySusan SusanMuldowney Muldowney by Illustrations by Cami

The road less travelled The road less travelled With borders closed and flights grounded, COVID-19 has sent the global travel industry into a tailspin. We take a look at how insurers can map a route to recovery.

With borders closed and flights grounded, few sectors have felt the impact of COVID-19 quite like the global travel industry. We take a look at how insurers can map a route to recovery.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM JOURNAL // ISSUE 03 2020 // ANZIIF.COM

57 55

IN SHORT ›i COVID-19 COVID-19 has has grounded grounded the the

global global travel travel industry, industry, and and this this has had had aa significant significant flow-on flow-on effect effect for for insurers. insurers.

TRAVEL TRAVEL BY BY THE THE NUMBERS NUMBERS

›i The The travel travel insurance insurance industry industry will need need to to consider consider whether whether pandemic pandemic exclusions exclusions are are feasible feasible in in the the future. future.

›i In aa post-pandemic post-pandemic landscape, landscape,

it’s the the agile, agile, innovative innovative insurers insurers who who look look set set to to lead lead the the way. way.

2019 2019

hen hen Qantas Qantas chief chief executive executive Alan Alan Joyce Joyce cut cut at at least least 6,000 6,000 airline airline jobs jobs due due to to COVID-19 COVID-19 back back in in June, June, he he warned warned of of aa long long and and challenging challenging road road to to recovery recovery for for the the global global travel travel industry. industry. The The airline’s airline’s international international flights flights were were unlikely unlikely to to resume resume ‘in ‘in any any real real size’ size’ until until July July 2021, 2021, he he stated, stated, adding adding that that all all airlines airlines were were ‘in ‘in the the middle middle of of the the biggest biggest crisis crisis our our industry industry has has ever ever faced’. faced’. COVID-19 COVID-19 has has grounded grounded the the global global travel travel industry. industry. Research Research from from the the World World Travel Travel & & Tourism Tourism Council Council estimates estimates that that prolonged prolonged pandemic pandemic restrictions restrictions could could jeopardise jeopardise more more thanmillion 197 million the sector than 197 jobs injobs thein sector and wipe and wipe off more than US$5.5 trillion from off more than US$5.5 trillion from global global GDP. GDP. The The flow-on flow-on effect effect for for travel travel insurers insurers has has been been both both swift swift and and severe severe with with sudden sudden cuts cuts to to revenue revenue and and aa spike spike in in customer customer complaints, complaints, leaving leaving the the entire entire industry industry wondering wondering ‘what ‘what does does the the future future hold?’. hold?’.

Responding Responding to to the the crisis crisis

This This question question was was addressed addressed in in aa recent recent ANZIIF ANZIIF webinar, webinar, Grounded: Grounded:Will WillTravel Travel Insurance InsuranceEver EverRecover?, Recover?,which whichwas was presented presented by by New New Zealand-based Zealand-based actuary actuary and Win-Li Toh. Toh. and principal principal at at Taylor Taylor Fry, Fry Win-Li Toh Toh outlined outlined the the challenges challenges facing facing the the industry industry and and noted noted that that insurers insurers who who are are ‘treating ‘treating their their customers customers well’ well’ will will be be among among those those who who make make itit to to the the other other side. side. However, However, insurers insurers may may have have some some work work ahead ahead of of them. them. Of Of the the approximately approximately 1,000 1,000 COVID-19-related COVID-19-related general general insurance insurance complaints complaints received received by by the the Australian Australian Financial Financial Complaints Complaints Authority Authority up up until until 27 27 May, May, almost almost 900 900 related related to to travel travel claims, claims, such such as as insurers insurers refusing refusing to to cover cover COVID-19 COVID-19 losses or provide refunds for losses or provide refunds for changed changed or or unused unused trips. trips.

INTERNATIONAL INTERNATIONALFLIGHTS FLIGHTS OnApril 18 April 2019, On 18 last year, 722 722international internationalflights flights departed departedand andarrived arrivedat at Australian Australianairports, airports,with withNew New Zealand, and China Zealand Singapore (174), Singapore (88) topping the(64) listtopping of destination and China the list departure countries. ofand destination and departure countries.

2020 2020

INTERNATIONAL INTERNATIONALFLIGHTS FLIGHTS Fast Fastforward forward12 12months monthsand and just just147 147overseas overseasflights flights landed landedand andtook tookoff offin in Australia, an 80% decline. Australia, a decrease of 80 per cent as travel bans grounded planes worldwide. The global tourism industry lost US$320 billion between January and May Takeup increased for2020, coverage to the World for according acts of terrorism following Organization. theTourism Bali bombing in 2002 and the Brussels train station attack in 2016, The International Air Transport Association predicts the airline industry won’t After the 9/11 attacks in return to pre-pandemic levels New York, demand for travel until at least 2024. insurance actually increased sharply worldwide.

Source: Sydney Morning Herald, ‘Silent Skies’, May 2020

ANZIIF.COM // ISSUE 03 2020 // JOURNAL ANZIIF.COM // ISSUE 03 2020 // JOURNAL

Who will be left standing?

LARENEG

GENERAL

ohW

bal hoT liw taht tavonni oleved nireffo egagne nevE i ynam da dna ehT‘ desuac tarepo nikniht d tuoba ereffid niS nI emaet apmoc ot ppa hwyna nehW raunaJ niS rof vitaitini c erom oitulos lytsefil uA nI recfifo gnikool rf-resu imaG‘ oc dna desiar C-tsop lpmaxe t seoD“ nap rof sna ]eb nottub ne tI‘ aorppa ellevart srednu

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The cost levartof lanchange oitanretni dna citsemod wen .raethat y sihrecovery t hcraM for ni sthe eicitravel lop ecnarusni Toh notes eritnerequires eht taht more raey tsthan al em ot the dias uoy fI‘ industry just mo h morf gShe nikrsays ow eb dlupeople ow ecfifo reopening,eof borders. that yas eneed hs ’,uthe oy ddesire eveilebtoetravel vah t’nagain, dluow I will not.sonly ot the segfinancial nahc gnirresources olpxe era ewith w ,ylwhich ralimiS‘ but also -reve ruo ot tpada ot tcudorp ruo to do it. lrow gnigisnahc The cost of airline travel, for’.dexample, expected to increase when lockdowns are lifted. Toh says if pandemics were to be included in travel insurance, this would also ‘come at a cost’. ‘If you don’t charge enough, then the solvency of travel insurers is at risk,’ she says. ‘If you charge too much, people simply can’t afford it.’ Most travel insurance policies don’t cover claims made in relation to pandemics after they have been deemed a ‘known event’. Some insurers have alsohchanged oT iL-niW yrFtheir rolyaT / hoT terms to exclude pandemics. Aimee McGuinness, chief underwriting officer at Allianz Partners, says the insurance industry must consider whether exclusions are going to be feasible in the future. Allianz, like many travel insurers,

ool ,stneve dlrow ot tcaer elpoeP rt elpoep fi neve ,oS .ytiruces dna emit eerht tub ,erofeb did yeht sa tiw pu dne ll’ew neht ,ecnarusni

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

temporarily ceased sale of new domestic egninsurance ahc fo tspolicies oc ehT and international travel vartyear. eht rof yrevocer taht seton hoT in Marchle this ehtto tsu j nalast ht eyear rom that seriuthe qerentire yrtsudni ‘If you said me elpowould ep tahbe t sworking yas ehS .from sredrhome, ob fo gninepoer office ,niaga lehave vart obelieved t erised eyou,’ ht deshe en ysays. lno ton lliw I wouldn’t hcihw htwe iw sare ecrexploring uoser laicchanges nanfi ehttoosour la tub ‘Similarly, ti od ot product to adapt to our ever-changing .world.’ si ,elpmaxe rof ,levart enilria fo tsoc ehT era snwodkcol nehw esaercni ot detcepxe eb ot erew scimednap fi syas hoT .detfil osla dluow siht ,ecnarusni levart ni dedulcni .’tsoc a ta emoc‘ eht neht ,hguone egrahc t’nod uoy fI‘ ehs ’,ksir ta si srerusni levart fo ycnevlos ylpmis elpoep ,hcum oot egrahc uoy fI‘ .syas ’.ti droffa t’nac revoc t’nod seicilop ecnarusni levart tsoM retfa scimednap ot noitaler ni edam smialc .’tToh neve/ Taylor nwonFry k‘ a demeed neeb evah yeht Win-Li rieht degnahc osla evah srerusni emoS .scimednap edulcxe ot smret gnitirwrednu feihc ,ssenniuGcM eemiA eht syas ,srentraP znaillA ta recfifo redisnoc tsum yrtsudni ecnarusni ni elbisaef era snoisulcxe rehtehw levart ynam ekil ,znaillA .erutuf eht fo elas desaec yliraropmet ,srerusni

Toh labels the travel insurers that will survive the crisis as ‘agile innovators’ — embracing new technology, developing more personalised offerings and learning from more engaged customers. Even before the pandemic, she says, many insurers were looking to innovate and adapt their model. ‘The Hayne royal commission findings caused many insurers to look at how they operate,’ she says. ‘A lot of innovation, thinking and discussion was taking place about developing the best products for different groups of customers.’ In Singapore, for example, Chubb teamed up with mobile technology company Grab to allow users of the Grab app to buy travel insurance ‘any time and anywhere’. When announcing the partnership in January 2020, Chubb’s country president for Singapore Scott Simpson said the initiative would allow Chubb to ‘develop more customer-centric insurance solutions that align with the varied lifestyles of consumers’. In Australia, nib Travel chief executive officer Anna Gladman says the insurer is looking at ways to make disclosures more user-friendly. ‘Gamification of the acceptance of terms and conditions was one of the first ideas raised when we started looking at the post-COVID environment,’ she says. ‘For example, a few simple questions, such as “Does this policy have a general exclusion for pandemic? Yes / No”, [would need to be] answered correctly before the buy button becomes active. ‘It enhances our customer-centric approach in an environment where travellers are eager to get a deeper understanding of coverage.’

‘People react to world events, looking for protection and security. So, even if people travel a third as much as they did before but three times as many buy travel insurance, then we’ll end up with the same income.’

MOC.FIIZNA // 0202 30 EUSSI // LANRUOJ

Hope for the future Gladman believes insurers will rise to the challenge of COVID-19. ‘We’ve been in a similar position before,’ she says. ‘Following the Bali bombing in 2002, right through to as recently as the Brussels train station attack in 2016, coverage for acts of terrorism was top of mind for travellers. ‘Insurers responded in a variety of ways to restore confidence in their products and, more importantly, provide reasonable, fair-priced solutions to travellers. Over the coming months and years, we’ll see similar changes in response to coronavirus.’ While the industry must adapt to change, Toh notes that consumer appetite for insurance may increase in a post-COVID world. ‘After the 9/11 attacks in New York, [demand for] travel insurance actually increased sharply worldwide,’ says Toh. ‘People react to world events, looking for protection and security. So, even if people travel a third as much as they did before but three times as many buy travel insurance, then we’ll end up with the same income.’ Toh’s optimism extends even further. ‘I’d venture that we could end up with a better outcome,’ she says. ‘We’ll reduce our impact on the planet with less air travel and, at the same time, we can provide a better, tailored and more responsive product that people are more engaged with and really want — a product that helps them, without loopholes, without fine print, without arguments.’

RELATED COVERAGE

Can travel insurance bounce back? by Susan Muldowney

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Travel insurers take immediate action on mental health by Anna Game-Lopata

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SUSAN MULDOWNEY Freelance writer & editor

‘Findings from the Hayne royal commission caused many travel insurers to reconsider how they operate and how they engage with consumers. The way they respond to COVID-19 will test their willingness to meet the needs of consumers with tailored, transparent products that are fit for the future of travel.’

PICTURED The Diamond Princess in quarantine in Yokohama, February 2020.

RISING TO THE CHALLENGE Despite the surge in travel insurance complaints in recent months, there have also been some good news stories. When the Diamond Princess cruise ship was placed under quarantine in Yokohama in late February following an outbreak of COVID19 onboard, two passengers had travel insurance with Allianz Partners Australia. During their four-week isolation and treatment period on the ship and in hospital, the passengers received daily welfare check-in calls from Allianz’s nurses and case managers to monitor their physical and emotional wellbeing. Andrew Wareham, Allianz’s regional head of medical operations, Asia Pacific, says the insurer also expedited a hospital cash allowance for necessary provisions while the customers were being treated and made sure they had their standard medications available to them. ‘We also faced a lot of ambiguities,’ says Wareham, ‘but our message to our customers was always clear — that no matter what, we were there to support them emotionally and psychologically and ensure that everything that needed sorting out would get sorted out.’

At AXA Singapore, extra effort was made to support customers prior to COVID-19 being declared a global pandemic. Julien Callard, AXA Singapore’s managing director, retail & health, says the company began offering a full premium refund to customers who requested the cancellation of their travel policy, and also waived the penalty fee if customers wanted to cancel their upcoming trips due to the crisis. ‘In addition, to provide more support during this period, we cover trip cancellation claims for healthcare frontliners who have to cancel their trips, irrespective of the date of the trip and travel insurance policy purchased,’ he says. ‘Our individual customers, including travel insurance customers, are also entitled to free COVID-19 coverage. Customers who are hospitalised due to COVID-19 receive a cash benefit of S$200 per day of hospitalisation, up to a maximum of 90 days and, in the event of death due to COVID-19, a S$20,000 lump sum will be paid out. Customers who are frontline healthcare workers receive double the protection.’

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

Professional indemnity insurance

RISK

by Susan Muldowney

FILLING THE CRACKS in PI cover

Shoddy building practices have resulted in professional indemnity cover for Australiaâ&#x20AC;&#x2122;s construction industry tightening considerably. Nonetheless, there are still ways in which the risks can be mitigated by both insureds and insurers.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

‘The issues that the insureds are now facing are dramatic increases in premiums, reductions in limits of indemnity and huge increases in excesses.’ Chris Bovill / Bovill Risk & Insurance Consultants

A IN SHORT › Defective building issues have led to professional indemnity premium increases and limited availability of cover across the construction industry.

› Reform across the industry will be informed by findings of the Shergold Weir Building Confidence report.

› Despite the challenges, there are some ways insurers can mitigate risk in their PI line of business.

ustralia’s construction industry has been facing an insurance crisis following alarming revelations of shoddy building practices that have put residents’ lives at risk. Cracks appearing in residential high-rises, such as Sydney’s Opal Tower, and the flammable cladding wrapping thousands of apartment buildings across the country have contributed to soaring premiums and limited availability of professional indemnity (PI) insurance. Can confidence in the construction industry be restored among insurers or will it prove too great a risk for PI cover? Concerns about the construction industry have been mounting for several years. In August 2017 — two months after London’s Grenfell Tower tragedy — the Building Ministers’ Forum commissioned academic and former senior public servant Professor Peter Shergold and lawyer Bronwyn Weir to compile a report on the effectiveness of compliance and enforcement systems for Australia’s building and construction industry. The report, Building Confidence, identified several flaws in the sector, including insufficient supervision, auditing and expertise across the industry. It also found that too many practitioners were willing to take short cuts to save money and time. ‘The hot-button issue in 2019 was flammable cladding,’ says Chris Bovill, managing director of broker Bovill Risk &

Insurance Consultants, which specialises in PI and builders’ insurances. ‘Everyone has now accepted the fact that you can’t get cover for it. The issues that the insureds are now facing are dramatic increases in premiums, reductions in limits of indemnity and huge increases in excesses.’

Cracks in the system In July 2019, Landmark Underwriting, then the last remaining provider of exclusionfree PI policies, pulled out of the Australian market, leaving practitioners such as certifiers exposed. State governments were quick to respond. In Victoria, for example, all building practitioners required to hold PI insurance became eligible to hold policies with exclusions for external wall cladding products from 25 February 2020. The New South Wales Government passed the Design and Building Practitioners Act in June, as part of sweeping legislative changes aimed at improving transparency and accountability in the sector. The new law requires construction professionals to declare compliance with the Building Code of Australia and be insured against ‘any liability’. Builders, designers, manufacturers and suppliers will also owe a duty of care to current and future building owners to avoid economic loss caused by defects, and the duty of care can be applied retrospectively to any building less than 10 years old.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

RISK

DEFECTIVE BUILDING DESIGNS CAUSING GRIEF FOR INSURERS 3

1 2

1 1994 – 2004

NEW ZEALAND

Leaky homes Tens of thousands of ‘leaky’ houses and apartments were constructed in New Zealand causing structural problems and health issues for residents. A 2009 PwC report estimated it would cost up to NZ$11.3 billion to repair all the faulty buildings.

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2 2014

3 2017

4 2018

Lacrosse Tower

Grenfell Tower

Opal Tower

MELBOURNE

Fire fuelled by flammable cladding raced up 13 levels of Melbourne’s residential Lacrosse Tower in November. In February 2019, owners of the apartments were awarded more than A$5.7 million in damages.

LONDON

Fire at London’s Grenfell Tower killed 72 people and prompted the Australian Government to launch an inquiry into its building and construction system.

SYDNEY

Residents of the 36-level Opal Tower in Sydney were evacuated after the concrete in the building’s walls and floors cracked on Christmas Eve. The developer has spent A$31 million repairing the building.

Problems in New Zealand 5 2019 MELBOURNE

Neo200 A fire quickly spread up eight floors of the residential Neo200 tower in Melbourne in February, with fire investigators finding defects in a number of the building’s safety measures.

6 SYDNEY

Mascot Towers

Mascot Towers in Sydney’s inner-south was closed to residents in June after cracks were found in its car park.

Australia is not the only country in the region to experience challenges in its construction industry. In New Zealand, leaky building issues have plagued the nation’s building sector since the 1990s. Many of New Zealand’s homes built between the late 1980s and 2004 included substandard plaster-style monolithic cladding systems and sealing, which allowed water to seep into the walls. As a result, many homes from this period harboured toxic mould. ‘Leaky buildings have been a major problem for New Zealand’s insurance industry,’ says John Sloan, owner of Sloan Risk Management Services. ‘Many people were left with major repairs without any recourse, because building guarantee insurance had expired by the time problems had emerged or the builders had gone under. Building certifiers and others also had problems getting PI insurance when insurers pulled out of insuring them, in a similar way to the cladding issue in Australia.’ Auckland-based insurance lawyer Crossley Gates says that while most insurers were able to mitigate the impact by adding leaky building exclusions to their policies from 2002, there were still exposures for claims already notified in previous years. The latent nature of the damage also meant that, despite New Zealand’s six-year limitation period, court proceedings were being brought a decade or more after the buildings had been completed. ‘This delay led to difficulties tracking down the relevant parties and establishing the critical evidence,’ he says. ‘Often the most culpable parties had disappeared or had gone into liquidation, leaving professional advisers with PI insurance, those entities fortunate enough to have public liability insurance and local councils to pick up the cost.’ In 2004, the New Zealand Government brought in new regulations requiring all buildings to have a cavity system to capture any rainwater. ‘A number of PI insurers started providing limited leaky building cover to buildings with that system; however, weather tightness is a multifaceted issue and I understand some of these insurers have suffered a higher incidence of claims than they expected,’ says Gates.

‘People were left with major repairs without any recourse, because building guarantee insurance had expired ...’ John Sloan / Sloan Risk Management Services

Rebuilding confidence In an article published in ANZIIF’s Journal in September 2019, Campbell Fuller, head of communications and media relations at the Insurance Council of Australia, commented that insurers would ‘need to see changes implemented before they can fairly and reasonably re-engage with the construction sector’. When asked today if insurers have seen meaningful reforms, Campbell is direct in his response: ‘Nothing significant has changed,’ he says. However, James Rigney, a disputes and resolutions special counsel focused on the insurance space at law firm Clyde & Co, says there has been a tightening of risk management practices in building consulting firms. He adds that insurers can mitigate risks by introducing sub-limits in their policies. ‘Insurers can say that a policy limit is set at $20 million, for example, but also implement a sub-limit for claims in relation to certain matters. This allows them to limit their exposure to certain issues.’ Steven Donley, special counsel in the construction professional indemnity practice at Clyde & Co, says insurers can also mitigate their risk in their PI line by insisting on audits of past building projects. ‘It’s the historic failings in regulation and lax practices from eight or nine years ago that are such a problem for insurers today,’ he says. ‘They’re insuring all the work that a professional does dating back 10 years until the limitation period on legal action expires.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

RISK

The biggest risk for insurers is not what the [building industry] is doing now, it’s what it did within the past decade.’ Despite a considerable tightening of PI cover for the construction industry, Bovill believes that most risks can be underwritten. ‘We’ve just come out of a soft market that has existed since 2004,’ he says. ‘Over the past decade, our clients’ premiums have very rarely gone up. More often, they’ve gradually reduced over that period. ‘All of a sudden, they’ve hit the wall where insurers are correcting the premium. Everyone is crying doom and gloom, but the same thing happened in 2001 when there was a shock to the insurance industry and the market hardened.

‘The biggest risk for insurers is not what the [building industry] is doing now, it’s what it did within the past decade.’ Steven Donley / Clyde & Co

‘The scarcity of insurers that would [insure] engineers or building surveyors was exactly the same.’ Bovill believes the ‘good risks’ will continue to get PI insurance. ‘Those in the industry who have not bothered to develop their professionalism, their risk management procedures, their systems and processes internally, are the ones who will face problems.’

SUSAN MULDOWNEY Freelance writer & editor

‘The cracks that appeared in Sydney’s Opal Tower apartment building on Christmas Eve 2018 symbolise an entire industry in need of reform. With the spotlight firmly focused on combustible cladding, I hope we don’t wait too long to hear stories of successful rectification.’

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

Cyber insurance

BROKING

by Abigail Murison

IN SHORT › Cyber insurance is a huge opportunity for brokers, as a new wave of industries purchases cover. › The conversation starts with risk management, because many customers may be unaware of the cyber risks their business faces. › Local, real-life examples, data

around cyber attacks and even demonstrations can help brokers explain and sell coverage.

Broking the

cyber sell As cyber attacks become more widespread and more costly to businesses, brokers can play a critical role in helping customers understand the ever-changing threats and how best to combat them.

Photography: iStockphoto

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

n June 2020, Australasian beverage and food company Lion announced it had been the subject of a cyber attack. Hackers used REvil ransomware to infiltrate the company’s network and demanded US$800,000 (A$1.16 million) to decrypt the company’s files. The attack forced the company to shut down its IT systems, leading to significant interruptions to production and product delivery to customers across Australia and New Zealand. Within a week, news of cyber attacks on New Zealand-based appliance manufacturer Fisher & Paykel and Japanese car maker Honda had also made headlines, with hackers stealing sensitive information and forcing temporary operational shutdowns. With companies big and small looking at potentially million-dollar ransoms and multimillion-dollar business interruption costs, cyber coverage should be an easy sell. In Allied Market Research’s recent forecast report, the global cyber insurance market is projected to be valued at more than US$28.6 billion by 2026.

New threats, new customers Financial institutions and tech companies were the first adopters of cyber coverage, but much of the future growth is expected to come from a new wave of industries and companies further down the supply chains — including small to medium-sized enterprises. ‘I have found interest from logistics businesses, conference organisers and not-for-profits, and also from specialised businesses like drone security,’ says Meena Wahi, director of Melbourne-based Cyber Data-Risk Managers. ‘Traditional businesses are seeing a paradigm shift with digital technology — which used to be only a small part of their business previously — become more central to their business. Meanwhile, cost-averse not-for-profits are now accepting that cyber insurance is a necessary expense to safeguard against financial loss.’ In Indonesia, Wiena Shakuntala, head of Financial Services & Professions Group at Aon, has also seen a change in the market. ‘While financial institutions, IT

start-ups and the health industry are the common purchasers of cyber insurance, the manufacturing industry is starting to open,’ she says. ‘A lot of this has to do with the adoption of cloud services and Internet of Things technology, in addition to concerns about protecting intellectual property.’ For other businesses, regulations and contractual obligations are driving the demand. ‘This started in the US market, and we’re now seeing it trickle down to businesses in New Zealand and Australia,’ says John Moore, senior underwriter at Delta Insurance. ‘For example, a bank or financial institution might tell a supplier that if they want to do business together, the supplier must prove they have cyber coverage in place — especially because of stricter privacy regulations and increased exposure to fines for severe harm caused by a data breach.’

Risk and opportunity Moore says that for brokers, selling cyber coverage doesn’t start with insurance. It starts with businesses understanding how technology, processes and people underpin their operation and what risks they are exposed to if things go wrong. ‘Does the business know what the impact of a cyber incident would be? Are they aware of the risks? Do they have an incident response plan, a business continuity plan, a disaster recovery plan, and have they tested them through simulated events? says Moore. ‘Cyber insurance then dovetails into the risk management discussion about transferring some of that risk.’ In order to start cyber risk management conversations, cybersecurity assessments, risk questionnaires and diagnostic tools can help brokers and customers identify gaps in cover, as well as cyberthreats that clients may not even be aware of.

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

BROKING

Some multinational brokers, such as Willis and Marsh, have already developed their own proprietary software tools for their brokers, and they may even be able to benchmark a business against others in its industry. Tools like this can help a broker uncover the business’s risk appetite, as well as its existing strengths and weaknesses in the face of a cyber attack. ‘For example, [local] councils may not be concerned with cyber insurance responding to business interruption costs from a cyber attack, given rates income may not be affected, whereas it’s a major concern for other businesses,’ says Moore. ‘Talking to a tech company, they may feel they have adequate internal resources to mitigate against many cyber

NEW CYBER COVERAGE CUSTOMERS Allied Market Research forecasts that the traditional cyber coverage customers — tech companies, banks and financial institutions — will take up more cyber cover, and expects additional growth to come from the following industries through to 2026:

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

Proof points Many businesses in the new wave of industries taking up cyber coverage outsource their IT operations and security. Moore says that they should be encouraged to keep their IT vendors honest, getting an outsider to confirm the vendor is performing the cybersecurity work it is tasked with, rather than discovering what hasn’t been done at claims time. ‘We were asked to quote cyber insurance for an international airport, which, to its credit, had just organised an independent, third-party cybersecurity assessment,’ says Moore. ‘The independent assessment highlighted the current IT vendors were letting the airport down in a number of key areas, including cybersecurity. The end result was that they fired an IT support vendor.’ Sometimes, seeing is believing, Shakuntala says. ‘In one instance, to raise a prospect’s awareness of cyber risk, with their permission, Aon performed a

‘Does the business know what the impact of a cyber incident would be? Are they aware of the risks? Do they have an incident response plan, a business continuity plan ...’ John Moore / Delta Insurance

Photography: iStockphoto

+ IT and telecommunications + Health care + Government & public sector + Retail and ecommerce + Manufacturing

attacks, but they might be very concerned about regulatory risk, privacy breaches and fines.’ Shakuntala says there are three main types of customer she encounters. The first type runs real cyber risks but is either unaware of them or misunderstands them. The second type thinks cyber risks may exist in their operating environment, but they don’t know for sure. The third type knows the risks are real, because they have already experienced them. ‘For customers in the first category, examples with details of the technical and financial impacts usually help to open their window. For customers in the second group, discussing policies and alignment with their business situation and strategy usually helps the most. For customers who have already experienced a cyber incident, the discussion usually goes directly to coverage and its related claim process,’ she says.

CUTTING THROUGH CYBER JARGON Data breach When sensitive or confidential data is stolen, transmitted or exposed. According to Risk Based Security, 8.4 billion records were exposed in the first quarter of 2020 alone.

DDoS (distributed denial of service) Flooding an online service or network with commands in order to disable it.

Hacking Gaining unauthorised access to data in a computer or network.

Malware A software virus or worm that infects a computer or network and disables it, or allows a computer hacker to access it remotely.

Ransomware A type of malware that denies a user access to their own data, unless they pay a ransom. According to global communications giant Verizon, 27% of malware attacks are ransomware attacks.

Social engineering / phishing Tricking people into revealing sensitive information or data in an attempt to get financial data. Phishing is an example of social engineering. Verizon found that 32â&#x20AC;&#x201C;33% of cyber attacks relied on social engineering.

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

BROKING

mini penetration test on the prospect’s internet-facing systems. Using publicly available internet tools, we brought in a technical specialist and gave the prospect a demonstration of how a cyber attack could be made — in real time, by anyone in the world with an internet connection.’

Collaboration is key

‘Clients like real-life examples ... They like to understand what will happen when they have a cyber attack: how and what they can claim.’ Meena Wahi / Cyber Data-Risk Managers

Cyber insurance can be confusing for customers, especially those who aren’t particularly tech-savvy. Shakuntala says brokers can play a critical role in the customer–insurer relationship. ‘Insurers are keen to have their survey data filled completely, with proper information. Meanwhile, customers need to see how the coverage details align with their business direction and needs. Brokers can play a bridging role: advising customers and providing value with insights to the insurer on client-specific situations or requirements.’ Wahi points out that there are also opportunities to collaborate with other business advisers like accountants, lawyers and cybersecurity firms, and work together as a team. ‘I also tend to seek alternate quotes from both national and international underwriters, which gives my clients more negotiating power,’ she adds. ‘Insurance is about liability and indemnity. My duty to clients is to ensure they have the right coverage for both — so sometimes I have to also ask insurers to combine policies.’

Moving targets

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

RELATED COVERAGE

Should businesses pay a cyber ransom?

by Jacques Jacobs and Chris Chivers

P Take me there

Brokers must ‘get technical’ to stay ahead by Anna Game-Lopata

P Take me there

ABIGAIL MURISON Freelance journalist

‘Most of us expect to be able to deal with businesses online, and we take IT systems and cybersecurity for granted — until something goes wrong. Cyber insurance is an exciting, challenging area for brokers to operate in, and presents an opportunity to build strong partnerships with clients and add real value.’

Photography: iStockphoto

So, what ultimately helps a customer understand cyber risk? Says Wahi: ‘Clients like real-life examples, but they are a bit tired of hearing about the Yahoo! data breach or Equifax. They want something close to reality. They like to understand what will happen when they have a cyber attack: how and what they can claim.’ Moore says that while most individuals are aware of cyber risks like social engineering via phishing emails — ‘you see them in your inbox every week’ — some New Zealand businesses wouldn’t have been aware of

targeted ransomware attacks until the recent media coverage of the Fisher & Paykel and Lion incidents. He also points to COVID-19 as an eyeopener, in terms of work-from-home and bring-your-own-device cyber risks. Sources like CERT NZ and the Office of the Australian Information Commissioner can help brokers stay up to date with recent incidents and best practice, and can also lead to better conversations with customers. With cyber risk changing constantly, IT systems and jargon becoming more complex and a new swathe of customers facing different threats, cyber insurance is a challenging product for brokers. And, as Wahi notes, cyber is only going to continue to evolve. ‘It underpins digital risk and has aspects like crime, reputational loss, personal privacy liability and intellectual property. It is a niche area that requires commitment and understanding.’

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NEW MEMBERS

NEW ANZIIF MEMBERS

ANZIIF would like to extend a warm welcome to its newest members.

*For the period 25 June to 7 September 2020.

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ANZIIFâ&#x20AC;&#x2122;S CORPORATE SUPPORTERS The ANZIIF Corporate Supporter Program brings ANZIIF and the insurance industry together to work on not-for-profit projects that offer long-lasting benefits to the community, the industry and its people. ANZIIF thanks its corporate supporters for their generous support.

Protecting Professionals

ANZIIF.COM // ISSUE 03 2020 // JOURNAL

THE LIST by Jo Davy

// Establish your priorities If your to-do list is so long that you don’t know where to begin, Carol Gill, an associate professor of organisational behaviour at Melbourne Business School, recommends allocating each task to one of four categories on an ‘Ease and Impact Matrix’. ‘Rank each activity according to the effort it will require and the impact it will have on your overall goals,’ she says. Tasks that require little effort for high reward are ‘quick wins’, while activities that are high effort / high reward are your ‘major projects’. Gill advises prioritising activities in these categories over low impact / low reward tasks, which should be completed when you have a spare few minutes. And if a task falls into the high effort / low reward category? ‘Bin it,’ she says.

ways to stay motivated The rise of remote working has posed new challenges for productivity levels as we adjust to life outside the office. Experts share their tips on how to stay motivated, work more efficiently and set yourself up for success.

// Set SMART goals SMART goals are Specific, Measurable, Achievable, Relevant and Time-bound, and are a great way to bring structure and clarity to your objectives and set yourself up for success. IAG New Zealand’s chief operating officer Melissa Cantell says effective goal setting has been pivotal to the success of the insurer’s ‘MyFlex’ initiative, which gives employees a range of flexible working options. ‘For flexible working to be successful, people need to have clear expectations on what they are accountable for and what good looks like, and then trust and support to get it done,’ she says. IAG reports improved employee productivity, wellbeing and engagement since MyFlex was introduced in 2017.

// Stop thinking and start doing ‘I am always asking procrastinators “what is stopping you from moving forward?”,’ says Kylie Denton, founder and director of Performance Advisory Group, which delivers high-performance coaching to clients in the financial services industry. ‘“What are you afraid of, that is getting in your way? What would move you forward? Who can support you and hold you to account?” Ask these questions to yourself and be totally honest.’ Gill is more emphatic: ‘Count down from three and just begin,’ she says. ‘Jumping in and working on even the simplest tasks helps to activate the brain’s drive system and gather momentum. And when you’re able to tick that small task off your list, the brain releases a burst of dopamine that feels pleasurable.’

// Minimise distractions ‘We haven’t got a lot of willpower and it depletes with use, like a muscle,’ says Gill. ‘You want to create conditions where you don’t have to use a lot of willpower, which means removing distractions from your workspace, ensuring you have the right set-up, getting a comfortable chair — anything that makes the job easier to engage in.’ Of course, some tools that are required for the job can also serve as a distraction, which is why Denton advises turning off email and phone notifications for a period of time each day.

JOURNAL // ISSUE 03 2020 // ANZIIF.COM

Illustration: iStockphoto

// Use self-compassion Denton says that emotions play a significant role in our motivational and productivity levels and isn’t surprised that some of us haven’t been operating at full capacity in the wake of COVID-19. ‘It’s important for staff to be really up-front, vulnerable and honest with their leaders and friends about how it is affecting them.’ Gill agrees: ‘This has been an incredibly difficult period for everybody. Give yourself some credit and know that it’s OK to make mistakes. Recalibrate and move forward rather than beating yourself up.’

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ANZIIF Journal, V43, Issue 3 (Sept 2020)

Articles inside

The road less travelled

A voice for New Zealand

Home truths of remote working

A crime against humanity